Will the Bank of Japan raise interest rates for the third time in December? Will the yen rise again?

Bank of Japan Governor Haruhiko Kuroda said in an interview last Saturday that if the economic performance meets expectations, the Bank of Japan will take its third interest rate hike this year. The market expects the Federal Reserve to continue cutting interest rates this month, will the continued narrowing of the US-Japan interest rate differential help the yen continue to rise?

Will the Central Bank of Japan raise interest rates for the third time this year?

Bank of Japan Governor Haruhiko Kuroda's first full fiscal year since taking office in April 2023 has made 2024 a milestone year. He ended the Bank's large-scale monetary easing program in March and raised interest rates for the first time in 17 years. Kuroda raised rates again by 15 basis points in July, which surprised many hawks and led to arbitrage closing positions and a global stock market correction.

The next rate hike will raise the policy Intrerest Rate of Japan's Central Bank from 0.25% to 0.5%, the highest level since 2008, and represents a significant change after long-term maintenance of negative Intrerest Rate -0.1.

According to Bloomberg, in a media interview published on Saturday, Ueda pointed out that he is closely following wage negotiations and any risks that may arise in the US economy, as Japanese authorities try to achieve a soft landing during the political transition. The strong wage growth achieved this spring was the driving force behind the Central Bank's decision to begin reducing stimulus measures in March.

The interest rate spread between the US and Japan will continue to narrow

The difference in interest rates between the United States and Japan may narrow this month due to the interest rate decisions of both parties. As of Monday, traders believed that there was a 67% chance of a rate cut by the Federal Reserve and a 61% chance of an interest rate hike by the Japanese Central Bank, doubling from a month ago.

Chief economist at Okayama Securities, and former Bank of Japan official Ko Nakayama believes that the next interest rate hike may come in December, the Bank of Japan has indicated that it will take action if the economy meets official forecasts. There is growing evidence to support this. However, if the Fed takes action and the Bank of Japan does not, it could highlight the Bank of Japan's cautious attitude and weaken the yen, which could also be a source of confusion and disrupt financial market stability.

Some economists also believe that the political factor of the ruling coalition losing a majority of seats may cause the Central Bank of Japan to postpone the interest rate hike until January.

The Central Bank of Japan will announce the Interest Rate decision on 12/19, while the Federal Reserve will conclude the FOMC meeting on 12/18.

Is the era of cheap yen coming to an end?

Due to its long-term low-interest rate policy, Japan is used by investors as a tool for carry trade and is one of the main reasons for the long-term depreciation of the yen. The yen has been depreciating since 2021, and the USD/JPY exchange rate has surpassed the 160 level several times in July. Japan intervened in the foreign exchange market in May to prevent further depreciation of the yen.

Note: Carry trade refers to borrowing money in low-interest rate countries (such as Japan) and exchanging it for the currency of higher-interest rate countries (such as the United States) to earn the interest rate differential.

The Nikkei 225 index has risen nearly 20% this year, making it one of the best-performing major indexes globally. The inflow of funds, coupled with the narrowing of the interest rate differential between the US and Japan, will help boost the Japanese yen. However, given that the interest rate differential between the two is still large, the extent of the upward momentum may be limited in the short term.

Is the era of cheap yen officially over? It can only be said that the historical low of the yen before has attracted the follow-up of the Central Bank and government of Japan, and has also had an impact on the livelihood of the Japanese people. It is difficult for the yen to continue to depreciate in the long term.

(This is not investment advice, please DYOR)

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