The Bank of Japan decided to raise interest rates again at its monetary policy meeting last month (31st), raising interest rates from about 0 to 0.1% to 0.25%, bringing Japan's short-term interest rates back to the level of about 0.3% in December 2008.
At the same time, the Bank of Japan announced a plan to reduce the amount of long-term government bond purchases. The amount of Japanese government bond purchases per quarter will be reduced by 400 billion yen. By the first quarter of 2026, the monthly bond purchase will be reduced to 3 trillion yen, which is 3 trillion yen compared with the current monthly purchase. The size of the debt was reduced by half to about 6 trillion yen.
Will the Bank of Japan raise interest rates again this year?
Under the influence of continued interest rate increases and balance sheet reduction, it continues to affect Japanese household deposits, mortgage interest rates, and corporate borrowing rates. But it also shows the determination of Bank of Japan Governor Kazuo Ueda to normalize monetary policy.
The ultra-loose monetary policy over the past many years has put the Bank of Japan under pressure. Japan was the last country in the world to have negative interest rates and did not end its negative interest rate policy until March this year. Therefore, this interest rate hike has intensified market speculation that the Bank of Japan will raise interest rates again this year.
Bank of Japan says: market instability will not raise interest rates, yen plunges
On Monday, the yen surged to 141.70 against the U.S. dollar, reflecting analysts’ reaction to the Bank of Japan’s hawkish remarks; however, less than 48 hours later, Bank of Japan Deputy Governor Shinichi Uchida’s dovish remarks said that when the market is unstable, the Interest rates will be raised, causing the yen to fall back to 147.90.
At the same time, Japanese government bond prices first fell sharply and then rebounded.
JPMorgan Asset Management: Bank of Japan will avoid raising interest rates in the short term
Japan's policy of raising interest rates has exacerbated market turmoil, and the unwinding of carry trades has affected conditions in many areas including credit, stocks and U.S. debt.
Seamus Mac Gorain, global head of interest rates at JPMorgan Asset Management, said the Bank of Japan may avoid raising interest rates again in the short term, and whether it will further tighten policy in the future will depend on the direction of the U.S. economy.
The Bank of Japan does have a path to action again, but that depends on the Fed cutting interest rates and successfully stabilizing the U.S. economy. However, this path will not be realized if the United States falls into recession.
Mac Gorain believes that the Bank of Japan may have to wait until 2025 to further tighten monetary policy. He said:
The Bank of Japan may carry out a series of interest rate hikes, but this requires a relatively good global economic environment. Obviously, the Bank of Japan will not take action until markets stabilize, which also depends on whether the U.S. and global economies can avoid recession.
However, according to a Bloomberg survey, about 65% of 34 economists expect the Bank of Japan to raise policy interest rates again before the end of the year. However, after the turmoil in the US stock market, pricing in the swap market shows that the probability of a 25 basis point interest rate hike by December has dropped to about 30% from about 60% a week ago.
