Purich: The Bank of Japan is expected to raise interest rates this week, with rates likely to reach 1% by the end of the year.

Zhong Xiaoyang, co-manager of the Plaisir Multi-Asset Fixed Income Strategy Fund, stated that if there are no significant negative news related to tariffs, the Bank of Japan is likely to raise interest rates at its meeting this week. Given the persistently high wage inflation and the more positive domestic demand outlook for 2025, the Bank of Japan is likely to increase interest rates. Plaisir expects this to be the first rate hike of 2025, with subsequent gradual increases, and the policy rate is expected to rise to 1% by the end of the year. The policy rate may even exceed 1% as it approaches the lower limit of the Bank of Japan's neutral interest rate range. Looking ahead, Plaisir pointed out that the Bank of Japan may consider balance sheet reduction and review its bond buying program after the June meeting. Japanese government bonds are now more attractive compared to other sovereign bonds due to hedging currency risks. However, due to the opposite policy direction of the Bank of Japan from other central banks, the performance of Japanese government bonds may lag behind other sovereign bonds. As the Bank of Japan gradually raises interest rates to a more restrictive level, the spread between short-term and long-term Japanese government bond rates may narrow, but the changes will be relatively slow. Meanwhile, investors holding longer-dated government bonds due to concerns about excessive government spending may demand higher premiums. In addition, the movement of the yen is mainly influenced by the difference in interest rates between Japan and the United States. Currently, the interest rate on US Treasury bonds is a major external factor. Plaisir predicts that the possibility of a sharp depreciation of the yen in the short term is low, as the recent major adjustment in the US Treasury bond market reflects tariff tensions and inflation pressures from the US outperforming other economies. Plaisir expects the yen to enter a consolidation phase, with the potential for appreciation if the Bank of Japan signals a rate hike. Plaisir also pointed out that Japanese officials have stated that the volatility of the yen is quite high, but the likelihood of large-scale intervention in the foreign exchange market is low. As US inflation may rise later this quarter, coupled with sustained economic growth, the market may further adjust its expectations for rate cuts this year, putting upward pressure on interest rates and leading to a rise in the US dollar against the yen. Investors should also be aware that trade policy may undergo significant changes, and the Fed may pause its rate-cutting pace. The two-way risks to economic growth in 2025 may be more significant than in 2024. Therefore, Plaisir expects the actual volatility of the US dollar against the yen in 2025 to remain at a high level.