4/22/2024

Bank of Japan may raise interest rates

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Key points:

  • Japan’s central bank may raise interest rates due to rising inflation.
  • The yen hit 154.70 to the dollar, close to a 34-year low.
  • The US dollar rose amid easing tensions in the Middle East.

There is a possibility that the Japanese Central Bank will raise interest rates in response to rising core inflation. In addition, there may be a gradual shift away from large bond purchase programs in the future.

The weakening of the yen against the US dollar continued, reaching 154.70 per dollar. This value is close to the 34-year low recorded last week (154.79) and is causing concern among traders. The value of the Japanese currency is close to the level of 155, which may provoke intervention from the Japanese authorities.

Consequences of the BoJ’s historic decision

In March 2024, the Bank of Japan (BoJ) made a historic decision to abandon the negative interest rate policy that had been in place for eight years. This marks a departure from previous policies aimed at stimulating economic growth and combating deflation through large-scale monetary support measures.

At its upcoming monetary policy meeting next week, the Bank of Japan (BoJ) will provide updated quarterly growth and inflation forecasts. Markets will be watching these forecasts closely, trying to figure out when the next interest rate hike will be.

When deciding on the timing of the next rate hike, the Bank of Japan will take into account the dynamics of inflation expectations. However, before making a final conclusion, the regulator will carefully study wage data and analyze how rising wages may affect prices in the service sector.

“We will proceed cautiously, first assessing the impact of our recent policy changes on the economy and inflation, and then considering further adjustments if deemed appropriate, perhaps learning about rate neutrality along the way,”

— said Bank of Japan Governor Kazuo Ueda.

Dynamics of exchange rates of major currencies

The US dollar rose slightly on Monday, approaching five-month highs. This comes as geopolitical tensions in the Middle East ease, which has weighed on markets in the past.

The euro, on the contrary, remained virtually unchanged. Rising prices for gold, the dollar and crude oil on Friday, driven by easing tensions, also contributed to lower volatility in foreign exchange markets.

This week, investors expect a number of important events that may affect exchange rates. On Thursday, US GDP data for the first quarter will be published, as well as the Personal Consumption Expenditures (PCE) index, which is a key indicator of inflation for the Fed.

In addition, the Bank of Japan will meet, and US corporate earnings data will be released.

On Friday, the British sterling rate fell to $1.2367, its lowest since mid-November.

By contrast, the Australian dollar rose 0.3% to $0.6440, recouping some of last week’s losses when it fell 0.7% to a five-month low of $0.6363.

The New Zealand dollar also rose in price, adding 0.4% to $0.5915. It lost 0.8% last week, testing the $0.5863 support level.

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