Bank of Japan must weigh Trump trade threats as it tightens policy
Subscribe to enjoy similar stories. A weaker yen is typically good for Japanese exporters but could push inflation higher because the country imports much of its energy and food. The Bank of Japankicked off a global market selloff last time it raised interest rates.
The likely rate increase this week will be less dramatic, but the real suspense lies in what comes next for the yen. Japan’s central bank looks poised to lift its key interest rate to 0.5%, from 0.25%, at its meeting Thursday and Friday, according to around 80% of economists polled by Reuters. The move would push borrowing costs to levels not seen since the 2008-09 financial crisis.
Strong wage growth and persistent inflation above 2% have finally convinced the BOJ that Japan’s economy can handle gradual tightening. Japanese companies gave an average pay rise of 5.1% last year, the largest increase in 33 years. The last rate increase in late July from the BOJ, which at the time coincided with a weak monthly jobs reading in the U.S., sent seismic waves across the globe—the Topix lost 20% in three days in early August while the Nasdaq also dropped 8% over the same period.
The unwinding of so-called carry trades—borrowing in cheap yen to chase higher yields elsewhere—seems to have been the culprit. But BOJ officials have learned their lessons. They have carefully telegraphed their intentions in recent weeks, preventing a nasty surprise like last time.
While the market had long expected the BOJ to raise rates last year, unexpectedly hawkish rhetoric in the July meeting sent the Japanese yen sharply higher. What is more, a big part of those carry trades seem to have been unwound already. While bets against the Japanese yen have ticked up in the past month or so,
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