The pace of Japan's interest rate hike is accelerating, and the target interest rate may exceed 1%

Former Deputy Governor of the Bank of Japan, Hiroshi Nakasone, said on Tuesday, "Japan has an environment for sustained interest rate hikes, and the central bank should make appropriate decisions at each meeting to raise interest rates as much as possible

He emphasized that raising interest rates is not only a tool to curb inflation, but also a key measure to reserve space for future policy adjustments.

The Bank of Japan has raised interest rates three times in a row since March 2024, with the latest one being in January, when it raised the policy rate to 0.5%. This level has reached a new high since 2008, but the central bank still believes that there is still room to move away from the "neutral interest rate" level. The Bank of Japan's previous research report estimated that the neutral interest rate may be between 1% and 2.5%.

Central Bank Governor Kazuo Ueda hinted after the last meeting that interest rate hikes may continue in the future, and the market generally expects the next rate hike to be in the summer of this year.

Wage growth and US economic resilience support expectations of Japanese central bank interest rate hike

The market has been concerned about whether the Japanese economy can withstand higher interest rates, but Zhong Zenghong said that it is unlikely for the Japanese economy to experience a severe recession in the short term. He believes that Japanese companies will generally raise wages in the 2024 wage negotiations, and this trend is expected to continue in 2025, enhancing consumer spending power.

The market is paying attention to terminal interest rates, and it is expected that there is still room for interest rate hikes

Currently, the market is closely monitoring the final interest rate level of the Bank of Japan. Although the current interest rate is 0.5%, if the economy maintains stable growth, the central bank may further push interest rates above 1%.

The mainstream market view is that the terminal interest rate of the Bank of Japan may be between 1% and 2.5%. However, given the high debt level of the Japanese government, the extent of future interest rate hikes still needs to be carefully evaluated.

Zhongzeng Hong reminded that Japan needs to reduce the ratio of government debt to GDP, otherwise long-term financial pressure may bring uncertainty risks. He pointed out, "It is dangerous to assume that financial markets will not be affected by debt pressure

Outlook for Japanese Yen Exchange Rate: Short term Benefits, Long term Risks Remain

The Japanese yen has recently rebounded against the US dollar, and the expectation of further interest rate hikes by the Bank of Japan may drive the short-term appreciation of the yen. The main influencing factors include:

1. Raising interest rates enhances the attractiveness of the yen: Higher interest rates mean higher yields on yen assets, which may attract more capital inflows into Japan.

2. Normalization of Bank of Japan policy: If Japan continues to raise interest rates, the market may further adjust its valuation of the yen, reducing the pressure of yen depreciation.

3. Impact of Federal Reserve Policy: If the Federal Reserve starts cutting interest rates in the second half of 2025, the narrowing of the Japan US interest rate differential will provide support for the Japanese yen.

However, the long-term trend of the Japanese yen still faces many challenges:

1. Japan's debt level is too high: If interest rates are raised too quickly, it may put enormous pressure on the Japanese government's fiscal burden and affect economic growth.

2. Inflation remains below target: Although Japan's core inflation rate has increased, it is still relatively mild compared to Europe and the United States, which may affect the central bank's room for further interest rate hikes.

3. Global economic uncertainty: If the global economy slows down, safe haven funds may flow back into the US dollar, suppressing the appreciation potential of the Japanese yen.

Zhongzeng Hong emphasized that the Bank of Japan should strengthen policy communication to avoid unexpected impacts on the market. He mentioned that the interest rate hike in January was relatively smooth because the central bank had sent a clear signal to the market in advance. The policy adjustment in July last year triggered severe market volatility, leading to criticism of the Bank of Japan.

The market generally hopes that in the future, the Bank of Japan can continue to improve transparency and policy consistency to reduce market uncertainty and enhance policy effectiveness.

Editor's viewpoint: The Japanese yen may appreciate in the short term, but the long-term trend still faces challenges

As the expectation of interest rate hikes by the Bank of Japan heats up, the Japanese yen may receive some short-term support, especially if the Federal Reserve starts to cut interest rates in the future, the narrowing of the Japan US interest rate differential may cause the US dollar to fall below the 150 support level against the Japanese yen.

However, in the long run, the Japanese economy still faces challenges such as high debt pressure, low inflation, and global economic uncertainty. If the Bank of Japan raises interest rates too quickly, it may lead to a slowdown in economic growth and to some extent affect the trend of the yen.

In the future, investors need to pay attention to the policy path of the Bank of Japan and the interest rate adjustments of the Federal Reserve. If the Japanese economy grows steadily, the yen is expected to strengthen steadily in 2025; But if the global economy declines, the market may re-enter the US dollar as a safe haven, limiting the appreciation space of the Japanese yen.