Will the Bank of Japan Raise its Interest for the Second Time This Year?

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Published: Jul 30, 2024, 15:14 GMT+00:00

Key Points:

In March 2024, the Bank of Japan increased the interest rate to 0.1% for the first time in several years.
Octa analyst believes that this time, the interest rate will remain unchanged, as it happened during the most recent meeting on 14 June 2024.
However, the Bank of Japan is expected to provide details on how it is going to reduce bond buying.

In March, the BOJ raised the interest rate from −0.1% to 0.1%, the first increase in several years. This time, the rate is likely to remain the same—at 0.1%. While many expect the BOJ to increase the interest rate, they are likely to do so later this year. The decision heavily depends on whether consumption will recover and if the inflation keeps around the bank’s 2% target. For now, the inflation exceeds the BOJ’s target, with June’s core inflation hitting 2.6%. In May, it was also higher than the target—at 2.5%.

‘The BOJ aims to increase the interest rate this year, but it’s unlikely to occur during the upcoming meeting. Yet, they are expected to announce how they plan to cut the bond buying. They may even reduce it a bit more than expected to avoid fueling JPY weakness’, said Kar Yong Ang, a financial market analyst at Octa. He added that investors expected a hawkish decision as short-yen carry trades were unwound ahead of the meeting. This resulted in USD falling to its lowest in around two months against JPY on Thursday.

In March, the BOJ ended bond yield control, which emphasises a shift away from a radical stimulus program. However, it didn’t reverse the JPY’s downward trend. During the previous meeting in June, the BOJ didn’t provide enough details on cutting the bond purchases, and JPY also weakened. This time, a detailed decision on tapering bond buying is expected. Currently, the BOJ buys about 6 trillion yen worth of bonds monthly. Some believe that they will roughly halve bond purchases in the coming years.

If the BOJ maintains the current interest rate, it may prompt selling activity. However, announcing detailed plans to significantly cut bond purchases may strengthen the yen. Technical analysis suggests the USD/JPY pair is likely to decline further toward support levels in the 152–149 zone, supported by RSI divergence.