There is little suspense around the Bank of Japan’s rate hike—how high can interest rates go?
The Bank of Japan will hold its policy meeting on September 17–18, and markets expect a 25-basis-point hike to 1.25%, the highest level since 1995. Overnight index swaps show the probability of a rate hike has risen to 97%. After tightening clearly accelerated—when the rate was raised to 0.75% in December last year and to 1% in June this year—Japan’s policy tightening pace has noticeably quickened.
At the end of July, the USD/JPY pair briefly approached 164. After intervention, it returned to around 155, but the spread between interest rates is still what ultimately determines the exchange rate. Since September, the yen has appreciated by nearly 4%, and the yield on Japan’s 2-year government bonds has also risen to about 1.83%.
Goldman Sachs @GoldmanSachs has raised its forecast for Japan’s terminal rate to 1.75%. Meanwhile, the U.S. Federal Reserve will also hold its policy meeting on September 16. With interest-rate conditions on both sides changing at the same time, carry trades that have long relied on low-interest yen funding are facing greater pressure.
The Bank of Japan will hold its policy meeting on September 17–18, and markets expect a 25-basis-point hike to 1.25%, the highest level since 1995. Overnight index swaps show the probability of a rate hike has risen to 97%. After tightening clearly accelerated—when the rate was raised to 0.75% in December last year and to 1% in June this year—Japan’s policy tightening pace has noticeably quickened.
At the end of July, the USD/JPY pair briefly approached 164. After intervention, it returned to around 155, but the spread between interest rates is still what ultimately determines the exchange rate. Since September, the yen has appreciated by nearly 4%, and the yield on Japan’s 2-year government bonds has also risen to about 1.83%.
Goldman Sachs @GoldmanSachs has raised its forecast for Japan’s terminal rate to 1.75%. Meanwhile, the U.S. Federal Reserve will also hold its policy meeting on September 16. With interest-rate conditions on both sides changing at the same time, carry trades that have long relied on low-interest yen funding are facing greater pressure.
