According to former board members of the Bank of Japan (BOJ), the central bank is unlikely to raise its benchmark interest rate again this year due to the economic turmoil caused by the sudden rate hike last time.
Sakurai Makoto, a former BOJ board member, stated in an interview with Bloomberg on August 12th that “they cannot raise interest rates again this year, at least not in the remaining time of this year. But it is still uncertain whether there will be a rate hike before March next year.”
In early August, the Bank of Japan suddenly raised its benchmark interest rate to 0.25%, triggering a sharp sell-off in the stock market and the cryptocurrency market.
This rate hike disrupted the yen carry trade, a trading method that allows investors to borrow yen funds at extremely low interest rates and then use the funds to invest in overseas assets. The main reason for the market turmoil was not the rate hike itself, but the sharp appreciation of the yen exchange rate in the foreign exchange market that followed. Starting from July 31st, the USD/JPY exchange rate dropped from around 153 yen to 145 yen.
With the rapid increase in the cost of yen-denominated loans, the total market value of the cryptocurrency market evaporated by more than $500 billion in just three days from August 2nd to August 5th.
Although the rate hike disrupted the global market, Sakurai Makoto believes that this measure is necessary for Japan because interest rates in Japan have remained between 0% and -0.1% over the past 17 years. He believes that the Bank of Japan’s move from near-zero interest rates to 0.25% is a positive change and suggests that the central bank should observe market reactions before considering further rate hikes.
In fact, not only Sakurai Makoto, but even current officials of the Bank of Japan have stated that there will be no further rate hikes during a period of economic pressure. According to a previous report by Zombit, the Bank of Japan’s Deputy Governor Naito Shinichi stated on August 6th that they will not implement rate hikes in a situation of financial market instability. He explained that unlike the rate hike process in Europe and the United States, Japan is not in a situation where “policy response lags behind if rate hikes are not conducted at a certain pace.” He stated that it is necessary to maintain the current accommodative policy in the short term if the market continues to be unstable.