Bank of Japan raises interest rates
31 JUL, 2024
By Jose Luis Palmer from RankiaPro Europe
The Bank of Japan raises interest rates by 15 basis points to 0.25%. This new decision by the Bank of Japan, against the trend of the world's major central banks, has caused the yen to strengthen during the month of July. The BoJ also outlined its plans for quantitative tightening, aiming to reduce its JGB holdings by 8% over the next two years.
According to David Zhou, Investment Director at abrdn multi-asset investment solutions, the USDJPY retreated from 162, due to a possible intervention by the Ministry of Finance after a softer than expected US CPI data. On the other hand, the market expects the Fed to cut in early September, which weakens the dollar in favour of the yen. David Zhou notes that the USDJPY carry trade sell-off has gained momentum with heavy selling in large cap tech stocks.
A sustained appreciation of the yen would require the outbreak of a recession in the US or a much more dovish Fed than currently expected by markets:
Most likely, yen strength will diminish and USDJPY will gradually move towards levels above 155 once the recent spike in volatility stabilises. Given that hedge funds have covered more than 80% of their maximum short positions since May, there is little scope for USDJPY to move below 152 (the support level that remains).
David Zhou, Investment Director, Multi-Asset Investment Solutions at abrdn.
Currently, in the face of falling equities, the yen has positioned itself as a safe haven asset, however, if the fall stabilises, the yen could lose this status.
If history is any guide, USDJPY tends to rise regardless of whether the BOJ hikes or pauses, unless there is overtly hawkish guidance on the pace of rise going forward.
David Zhou, Investment Director, Multi-Asset Investment Solutions at abrdn.
According to Junichi Inoue, Portfolio Manager and Head of Japanese equities at Janus Henderson, the net impact of the rate hike carried by the Bank of Japan is positive, as households are net lenders and corporates will start to consider the cost of money before stabilising their business strategies, resulting in better decisiones, improved returns and efficiency. Inoue also believes that higher interest rates are positive for the equity market, as due to the yen's weakness, market was using a range of 130-140 yen to dollar to assess companies value.
As the BOJ provides better visibility for monetary policy, it should stabilize the currency, improving sentiment among foreign investors.
Japan is only at the beginning of interest rate normalization. The real question is not about the next rate hike but what the terminal rate will be.
Junichi Inoue<strong>, </strong>Portfolio Manager and Head of Japanese equities at Janus Henderson
