Analysts at Fitch Solutions’ BMI said that the Bank of Japan will take a more cautious approach to tightening monetary policy in order to avoid a sharp appreciation of the yen after recent turmoil in the global market.
"We now expect the Central Bank of Japan to raise the rate by only 25 basis points this year, to 0.50%," analysts said, adding that the previous forecast suggested a 0.5% rate increase.
Interest rate hikes by the Bank of Japan led to the unwinding of the popular yen carry trade, which led to a sharp sell-off in global markets last Monday. Carry trade is a strategy in which an investor borrows money in a currency with low interest rates, such as the Japanese yen, and invests it in high-yielding assets. Experts said that a weaker yen provided support to the stock market, but its rapid strengthening could lead to higher volatility.
As for the outlook for next year, BMI analysts believe that the Bank of Japan will be able to raise rates by only 0.25%, since the Fed is expected to cut rates to about 3% next year. This means that the Bank of Japan will be limited in the scope of monetary policy tightening, as this could lead to a significant strengthening of the yen, analysts said, adding that by the end of 2025, interest rates in Japan are likely to reach 0.75%, which will be lower than the Bank of Japan's terminal rate of 1.00%