Bank of Japan Takes Cautious Stance on Interest Rate Hikes Amid Market Turmoil

The Bank of Japan (BoJ) is set to adopt a more cautious approach to interest rate hikes, according to a recent note from Fitch Solutions' BMI. Analysts predict that the BoJ will increase rates by only 25 basis points this year, bringing the benchmark rate to 0.50%, a reduction from their earlier forecast of a 50 basis point hike. This decision comes in the wake of significant global market volatility triggered by previous rate increases, which led to a sharp sell-off in markets, including a 12% plunge in Japan's Nikkei 225, marking its worst day since 1987. The unwinding of the yen carry trade, where investors borrow in low-interest currencies like the yen to invest in higher-yielding assets, has contributed to this market instability. A weaker yen has previously supported Japan's stock market, but a rapid appreciation could lead to increased volatility. In response to the recent turmoil, BoJ Deputy Governor Uchida Shinichi confirmed that the bank would refrain from raising policy rates during this period of instability. Looking ahead, BMI forecasts that the BoJ will only manage a 25 basis point increase in 2025, as the Federal Reserve is expected to cut rates significantly. This scenario suggests that the BoJ's rate hikes will be limited to avoid a stronger yen, with projections indicating an end-of-year rate of 0.75% in 2025, below the BoJ's terminal rate of 1.00%. Since August 5, the yen has weakened by approximately 2%, currently trading at 147.42 against the U.S. dollar.