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Many economists believe the Bank of Japan will raise rates this year to slow yen depreciation.

TraderKnows
TraderKnows
05-24

According to media surveys, most economists predict that Japan will raise interest rates within the year.

A Reuters survey shows that nearly two-thirds of economists believe the Bank of Japan will start reducing its bond purchases by the end of July, while nearly 90% of economists predict the Bank of Japan will raise rates by at least 0.20% by the end of the year.

This result indicates that, despite most other major central banks leaning towards easing policies, the Bank of Japan will pursue mild tightening measures.

Although the Bank of Japan ended its negative interest rate policy in March, it continues to purchase about 6 trillion yen ($38.3 billion) in government bonds monthly to avoid a sudden rise in yields.

However, the Bank of Japan is facing growing political pressure to slow the depreciation of the yen and has been forced to adopt measures such as reducing bond purchases and increasing interest rates. The Bank of Japan has been criticized for compressing household income by increasing import costs.

In a survey conducted from May 16 to 22, 41% of economists (11 out of 27) predicted that the Bank of Japan would decide to reduce its bond purchases as early as the June meeting, while another 22% believe this decision will be made in July.

Ayako Fujita, chief Japan economist at J.P. Morgan Securities, said: “The decision to start reducing bond purchases at the early stages of policy normalization is seen as a consensus among policymakers and is appropriate to alleviate further depreciation pressure on the yen.”

Three economists predicted that the decision would be announced in September, while another three believe the central bank will wait until 2025 or later.

Last week, the Bank of Japan suddenly reduced the amount of Japanese government bonds it was willing to buy during its regular purchase operations. On Friday, Japan's 10-year government bond yield broke through 1% for the first time in 12 years, and the market expects the Bank of Japan to tighten policy further.

Despite 53 of the 54 economists surveyed this month predicting that the next rate hike will not occur in June, 88% (43 out of 49) said the policy rate would increase to at least 0.20% by the end of the year, up from 65% in the April survey.

Specifically, 47% (25 out of 53) of economists indicated that borrowing costs will rise to between 0.20% and 0.35% in the July-September quarter. Another 41% (20 out of 49) predict that the Bank of Japan will raise rates to 0.20% or 0.25% in the October-December quarter.

Seven economists who expect a rate hike next quarter also believe that the policy rate will rise to between 0.30% and 0.50% in the three months ending in December.

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Interest rate

Interest rates are one of the most crucial variables in the financial markets, affecting the economic decisions of individuals, businesses, and governments. In a broader sense, interest rates are defined as the cost of borrowing or the price of using funds, usually expressed as a percentage in the form of an annual interest rate. The level of interest rates directly influences economic investment, consumption, savings, and the overall rate of economic growth.

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