The Bank of Japan (BOJ) may raise interest rates three times this year to double current levels if the yen’s weakness persists, according to Citi’s head of markets for Japan, Akira Hoshino. Should the US dollar rise above 160 yen, Hoshino anticipates the central bank will likely increase the overnight call rate by a quarter of a percentage point, bringing it to 1 per cent in April. He also foresees the possibility of another hike of the same magnitude in July, and potentially a third by the end of the year if the Japanese currency remains weak.
Hoshino explained that the yen’s weakness is driven by negative real interest rates, where yields remain below inflation. He suggests the BOJ has no alternative but to address this issue if it wishes to reverse the exchange rate’s current trajectory. He noted that BOJ officials are increasingly focused on the potential impact of the yen’s fluctuations on inflation, especially as consumers become more sensitive to rising prices.
While most BOJ watchers anticipate the next rate hike will occur in several months, some believe the bank may act sooner if the yen continues to decline rapidly. Economists surveyed by Bloomberg predict one rate hike every six months, with July being the most likely time for the next increase. Traders are pricing in one rate increase by July and see a 90 per cent chance of another by December, based on pricing in the swaps market.
Hoshino expects the yen to trade in a range of just below 150 to 165 per dollar this year. On Tuesday morning in Tokyo, the Japanese currency traded at 158.2, after hitting an 18-month low of 159.45 last week. Citigroup is a global financial services company providing a range of banking and investment services. Citi’s traders and salespeople in Tokyo are poised to assist Japanese institutions looking to shift investments from abroad back into domestic fixed-income assets if key interest rates, such as 10-year bond yields, begin to outpace inflation.
