The US Federal Reserve decided on the 19th to cut rates by 1 Bit, but hinted that it will slow the pace of rate cuts next year, from the previous estimate of 4 Bits to only 2 Bits, followed by the Bank of Japan's announcement to keep the policy interest rate unchanged at 0.25%, temporarily easing the risk of unwinding the Yen carry trade.
However, the USD/JPY has fallen below 157 this morning, and experts estimate that if the Yen continues to depreciate, it will put pressure on the Bank of Japan to raise interest rates. And after the election of Trump, the overall global economic uncertainty has risen sharply next year, also increasing the uncertainty of Japan's rate hike path.
The following will give you a quick overview of the minutes of the Bank of Japan's October meeting, observing the central bank officials' views on the outlook for monetary policy.
Policy interest rate may rise to 1.0% by the end of 2025
The October meeting minutes showed that the Bank of Japan's policymakers agreed that if the economic and inflationary trends meet their expectations, they will gradually raise interest rates, which may reach 1.0% by the end of fiscal year 2025.
However, the Bank of Japan's meeting minutes also emphasized that in the face of rising domestic and global economic uncertainties, they will adopt a cautious approach to monetary policy. One official pointed out that "the Bank must take time and be cautious in deciding when to raise interest rates, as Japan's policy interest rate has never exceeded 0.5% in the past three decades." (A rapid rise in interest rates will also be detrimental to debt)
Officials mainly see the domestic wage growth trend, financial market conditions, and the uncertainty of economic policies after the US presidential election as the main risks to be monitored.
Kazuo Ueda pointed out in the press conference on the 19th that the decision to keep the interest rate unchanged in December is mainly to wait for more data on the wage growth trend after the 2025 spring labor-management negotiations (Shunto), and to further clarify the US economic policies after Trump's inauguration.
When will the debate on the Bank of Japan's rate hike turn to how high
Currently, the market is divided on the timing of the Bank of Japan's next rate hike. A recent Reuters survey of economists showed that all respondents expect the Bank of Japan to raise the policy interest rate from the current 0.25% to 0.50% by the end of March, although they are divided on the timing of the rate hike.
However, although the central bank estimates that there is still room to raise rates to around 1%, some central bank officials point out that recent sluggish domestic consumption indicates that rates may be even lower. Former BOJ board member Takahide Kiuchi believes that once the rate is raised to 0.5%, the Bank of Japan will slow the pace of rate hikes, as further hikes will bring borrowing costs closer to neutral levels.
He predicts:
The Bank of Japan may believe that Japan's neutral interest rate is slightly below 1%, and is expected to raise the rate to 0.5% in January next year, and to 0.75% around September next year, and after the rate is raised to 0.5%, the Bank of Japan will adopt a more empirical approach, closely evaluating the impact of each rate hike on the economy.
Further reading: Bank of Japan keeps rates unchanged at 0.25% - When will the Yen carry trade unwinding crisis erupt?
The US-Japan interest rate differential narrows, and hot money in the US stock market may shrink next year
Regarding the further development of the Yen carry trade, which is seen as a huge unexploded bomb in the market, an anonymous expert commented to Blocktempto:
The Bank of Japan may raise rates by 3 Bits to 1% by 2025, and the latest forecast of the US Federal Reserve is that it will cut rates by 2 Bits next year, so the round-trip interest rate differential will be directly reduced by 1.25%, and it is expected that next year the shrinkage of the interest rate differential will cause the Yen borrowing-based US stocks and hot money to shrink.
In addition, the Nikkei News reported last week that based on the Bank of Japan's rate hike next year and the expectation of further rate cuts by the Swiss National Bank, operations that choose the Swiss Franc instead of the Yen as the funding currency are becoming more and more active in the global capital market. The Yen selling brought about by active Yen carry trade may also be alleviated as a result.
However, Bloomberg earlier this month cited an analysis by Shusuke Yamada, the head of Japan foreign exchange and interest rate strategy at Bank of America in Tokyo, saying that if the Bank of Japan delays the rate hike to March next year, the Yen carry trade may resurge during this period.
