Fitch Solutions' research firm BMI stated in a recent report that the Bank of Japan will adopt a more cautious approach to raising interest rates to avoid a rapid appreciation of the yen following recent global market turbulence.

In a report on Wednesday, BMI analysts said, "We expect the Bank of Japan to take a more cautious approach by raising interest rates by another 25 basis points this year, bringing the rate to 0.50%, lower than our previous estimate of 50 basis points

The current interest rate in Japan is 0.25%, and interest rate resolutions will be held on September 20th, October 31st, and December 19th.

The Bank of Japan's interest rate hike led to the closure of popular yen arbitrage trades, resulting in a significant sell-off in global markets last Monday. The Nikkei 225 index plummeted by 12%, marking the worst day since 1987. Afterwards, the index rebounded significantly, far higher than the level before last Monday's sharp decline.

Since August 5th, the Japanese yen has depreciated by about 2%.

The weakening of the yen has helped support the Japanese stock market, while the rapid strengthening of the yen may lead to greater volatility.

After the market turmoil, the Deputy Governor of the Bank of Japan, Maki Uchida, issued a statement confirming that the Bank of Japan will not raise policy interest rates in the face of market instability.

BMI predicts that by 2025, the Bank of Japan will only raise interest rates by another 25 basis points, while the Federal Reserve expects to cut interest rates by about 200 basis points next year, bringing them down to 3%. BMI stated that this means that the Bank of Japan will be limited in terms of the magnitude of interest rate hikes, as raising interest rates may lead to a significant strengthening of the yen.

The report added, "This means that by the end of 2025, Japan's interest rate will be 0.75%, lower than the Bank of Japan's final interest rate of 1.00%

USD/JPY daily chart