Former BOJ Board Member Predicts Unlikely Rate Hike for Remainder of Year

The Bank of Japan’s (BOJ) prospect of raising interest rates again this year appears slim, although the possibility of a hike before March remains uncertain, according to insights from a former BOJ board member.

Market Reactions and Economic Context

The recent economic challenges triggered by an unexpected rate increase have led to a stance of caution among policymakers. Makoto Sakurai, previously on the BOJ board, indicated in an August 12 interview that:

“They won’t be able to hike again, at least for the rest of the year.”

Sakurai further elaborated on the uncertain outlook, stating:

“It’s a toss up whether they can do one hike by next March.”

Following the BOJ’s sudden decision to raise the benchmark rate from 0% to 0.25%, both equities and cryptocurrency markets experienced significant sell-offs, particularly in early August. The sudden hike created turmoil in the Yen Carry Trade market, which is characterized by borrowing in Yen at low-interest rates to invest in foreign assets.

Impact on Currency Exchange Rates

The aftermath of the rate hike was highlighted by the volatile exchange rate of the Yen. In the following days, the USD/JPY exchange rate dramatically fell from approximately 153 yen to 145 yen per dollar, reflecting a surge in the Yen’s value.

Broader Market Effects

The immediate result was a significant increase in the costs of yen-denominated loans. Subsequent days saw a sharp decrease in the total cryptocurrency market cap, which dropped by over $500 billion between August 2 and August 5.

Sakurai emphasized that while the rate hikes have unsettled global markets, they represent a necessary adjustment for Japan, which maintained rates for 17 years within a range of 0 to -0.1%. He remarked:

“In the process of returning to normal monetary policy, it’s good that they decided to move from a world of almost zero interest rates to a normal 0.25%.”

Future Prospects and Stability Measures

In light of the market upheaval, the BOJ has indicated it would refrain from further rate increases, especially during times of economic instability. Deputy Governor Shinichi Uchida addressed this issue on August 6, underscoring the importance of maintaining current monetary easing amid significant market fluctuations.

“As we’re seeing sharp volatility in domestic and overseas financial markets, it’s necessary to maintain current levels of monetary easing for the time being,” Uchida stated.

The BOJ’s decision has prompted criticism from Japan’s primary opposition party. Following the public holiday on August 12, a parliamentary committee is expected to convene on August 13 to discuss the possibility of summoning BOJ Governor Kazuo Ueda and Finance Minister Shunichi Suzuki for questioning regarding their policies.