Investors on Alert for Another Japan Rate Hike

Japan’s central bank, the Bank of Japan (BOJ), may raise its key policy interest rate again later this year, the second hike since July, potentially stirring further upheaval in global markets [para. 1]. This speculation has arisen following data that revealed consumer inflation in the Tokyo metropolitan area accelerated to 2.6% year-on-year in August, suggesting a nationwide inflation trend. Additionally, Japan’s real wages increased year-on-year in June for the first time in over two years [para. 2].

The BOJ had ended its long-standing policy of negative interest rates in March and raised its key policy rate to 0.25% on July 31, causing a significant downturn in Japan’s stock market and sparking worldwide market turmoil [para. 3]. Investors are keenly watching for indications that the BOJ might raise the interest rate again after its two-day policy-setting meeting commencing on September 19 [para. 4].

Deputy Governor Ryozo Himino confirmed in a speech that the BOJ would consider raising interest rates as long as inflation aligns with its projections. He elaborated that the central bank’s stance involves examining the market developments and the impact of the July rate hike. If the BOJ gains more confidence in its economic and price outlook, it will adjust the monetary accommodation accordingly [para. 5]. Himino acknowledged the global market disruptions resulting from the BOJ's recent interest rate hike, emphasizing the need for careful monitoring of financial and capital market developments [para. 6]. Another BOJ deputy governor promised to consider market stability and avoid interest rate hikes if the conditions are unstable [para. 7].

The BOJ's policy shift comes amid rising inflation and wages, suggesting the end of a three-decade-long economic stagnation in Japan. In June, Japan’s real wages increased by 1.1%, marking the first year-on-year rise since March 2022. Regular wages for permanent workers rose 2.7%, while nominal wages grew 4.5% — the fastest rate since January 1997, significantly exceeding expectations [para. 9]. Tokyo's consumer price index increased by 2.6% year-on-year in August, surpassing both the consensus estimate and the July rate, with core CPI growth hitting a five-month high [para. 10].

This policy shift, however, places the BOJ at odds with other major economies, especially the U.S., which are transitioning from rate hikes to rate cuts due to decreasing inflation [para. 11]. The U.S. Federal Reserve has indicated a potential cut in interest rates, and a narrowing interest rate gap between Japan and the U.S. could lead to further unwinding of yen carry trades [para. 12]. Yen carry trade involves borrowing in yen at low interest rates and investing in higher-yield assets denominated in other currencies or assets like stocks and Bitcoin [para. 13].

For years, Japan’s low interest rates facilitated raising funds in yen for higher-yielding investments. However, the July rate hike increased yen financing costs, reducing the appeal and profitability of these trades. This led to the unwinding of risky asset bets, causing a surge in yen demand and a drop in stock prices globally [para. 14]. Another rate increase by the BOJ could trigger renewed financial volatility, according to analysts [para. 15]. Nomura's chief Japan economist, Kyohei Morita, anticipates the BOJ will likely raise its policy interest rate in either October or December, favoring December due to clearer wage outlook data from the Japanese Trade Union Confederation [para. 16].

Contact: Zhang Yukun (yukunzhang@caixin.com), Editor: Nerys Avery (nerysavery@caixin.com) [para. 18].