Bank of Japan: Raises interest rates by 25 basis points

The Bank of Japan announced a 25 basis point rate hike, raising the target interest rate from 0.75% to 1.00%. The Bank of Japan stated that it will suspend the reduction of bond purchases from April 2027 and maintain the monthly purchase volume of Japanese government bonds at around 2 trillion yen. According to a survey by industry media, almost all Bank of Japan watchers expected the central bank to raise the benchmark interest rate by 25 basis points to 1% at the end of the two-day meeting on Tuesday. The Bank of Japan had previously stated that Governor Haruhiko Kuroda had recently been hospitalized for treatment of a liver cyst infection and would submit his views to the board in writing, rather than participating in the vote in person. The anticipated rate hike by the Bank of Japan will be the first since December last year, coinciding with the Bank of Japan policymakers facing the inflationary risks brought about by the Middle East conflict - even though the formal signing of the agreement to end the war is imminent. The market will closely monitor clues as to when the Bank of Japan may take action again, as traders fear that if the yen weakens, Japanese authorities may take measures to intervene in the forex market after the meeting. Will the yen arb trade storm recur? It is worth mentioning that when it comes to the rate hike by the Bank of Japan, many people can't help but think of the "global storm" triggered by the closure of yen arb trades in August 2024 - at that time, the closure of yen arb trades caused severe fluctuations in the global market, with the Nikkei 225 index plunging by 12% in one day, and US stocks also plummeting. However, this time, the "impact" of the Bank of Japan's rate hike may not be so significant. The primary reason may be that the global monetary policy environment is already quite different from two years ago. This time, the rate hike by the Bank of Japan is not a move against the tide. In 2024, the rate hike by the Bank of Japan actually occurred amidst a global trend of easing, with the Bank of Japan raising rates and the Federal Reserve cutting rates resulting in a sharp collision. Now, various countries are already on track to raise rates. The decision by the Bank of Japan to raise rates is actually just to align with other central banks that are tightening policies - including the European Central Bank, which raised rates just last Thursday. Even with the policy rate increased to 1%, Japan will still have one of the lowest interest rates among developed countries. Furthermore, market participants had already anticipated the rate hike by the Bank of Japan today, and in a sense, the Bank of Japan's actions were even criticized by many for being too sluggish, as evidenced by the selling pressure on the yen and Japanese bonds in recent weeks. Unlike in the past where concerns were about the closure of arb trades causing a sharp rise in the yen, many investors are now more concerned about whether the rate hike will still be unable to stop the current depreciation trend of the yen. Despite the Japanese authorities already intervening with record-sized interventions to support the yen exchange rate, the yen still hovers around the key threshold of 160 yen per US dollar - the Japanese government had previously intervened in the market when the exchange rate reached this level. For a resource-importing country like Japan, a currency depreciation will exacerbate inflationary pressures. Foreign exchange market positioning data shows that speculative short yen positions have risen to a nine-year high recently, indicating that despite intervention risks and the potential rate hike by the Bank of Japan, yen arb trades are still heating up. Macro analyst Taro Kimura stated, "With other major central banks raising rates, interest rate differentials may again become a major driver of yen weakness, increasing the risk of upward inflation." Is the Bank of Japan's rate hike action too late? An interesting phenomenon is that after the yield on Japanese government bonds finally became high enough to attract global fund managers back to the market more than a year ago, many overseas investors are now starting to withdraw. Institutions such as T. Rowe Price Group Inc., Schroders Global Group, and Brandywine Global Investment Management have recently reduced their investments in Japanese long-term government bonds, or hold only a small amount of such bonds. The latest data shows that in April, the amount of Japanese super long-term government bonds sold by overseas investors exceeded the amount bought, marking the first time since 2024. This change reflects market concerns that even if the Bank of Japan is expected to raise rates on Tuesday, the pace of its monetary policy tightening may not be enough to curb inflation and stabilize the market. For many, the allure of record high yields on Japanese bonds this year has been overshadowed by concerns about the Bank of Japan's slow response and susceptibility to political pressure. JP Morgan pointed out that the market has already priced in many expectations for the Bank of Japan's future rate hikes, and that for a hawkish surprise, the Bank would need to clearly indicate a faster pace of rate hikes, or even raise rates above the neutral rate, but this possibility is low. At the same time, if the Bank decides to slow down or even suspend the reduction of bond purchases from April 2027, it may be interpreted by the market as dovish. Overall, there is a higher risk of the meeting result being interpreted as dovish, which could lead to selling pressure on the yen. JP Morgan emphasized that the current environment is significantly different from the summer of 2024. At that time, the unexpected interventions by the Japanese Ministry of Finance and the rate hike by the Bank of Japan, along with weak US employment data pushing up expectations of a rate cut by the Federal Reserve, led to a broad-based depreciation of the US dollar, ultimately triggering a massive short-covering of the yen, causing the US dollar to plummet by more than 20 yen. In comparison, the current rate hike and interventions are already partly priced in by the market, and after strong US employment data, the market is starting to price in expectations of a rate hike by the Federal Reserve, giving broad support to the US dollar. This article is reproduced from "Cai Lian Society", GMTEight Editor: Feng Qiuyi.