The Bank of Japan (BOJ) is not expected to implement further interest rate hikes this year, according to former board member Makoto Sakurai. In a recent interview, Sakurai cited market turbulence following the BOJ’s July rate increase and the slow pace of economic recovery as reasons for this cautious outlook.
“It’s a toss-up whether they can do one hike by next March,” Sakurai added.
On July 31, the BOJ raised its key interest rate to 0.25% from a range of 0.00% to 0.10%, marking the first increase in over a decade. This move, while seen as a step towards normalizing monetary policy, has sparked significant market reactions. The Japanese yen surged, and stocks experienced their worst crash since 1987, prompting concerns among investors and policymakers alike.
Moving away from the zero interest rate policy had a notable impact on carry trades, a popular strategy among investors. The strengthening yen triggered an unwinding of these “risk-on” yen carry trades, where investors borrow in low-yielding currencies like the yen to invest in higher-yielding assets.
This unwinding contributed to a broader slide in risk assets, including cryptocurrencies. Bitcoin, for instance, saw a sharp decline from around $65,000 to $50,000 in less than a week, though it has since partially recovered.
Sakurai criticized BOJ Governor Kazuo Ueda’s communication style, suggesting that Ueda failed to adequately convey the bank’s intention to maintain an overall easing stance. This lack of clarity, Sakurai argues, led to market perceptions of a more aggressive rate hike trajectory than intended.
“Academic economists tend to be too forthright because the answers can be found in numbers,” the former BOJ board member said. “But the actual economy is not that simple. So authorities also need to feel their way and navigate the reality.”
BOJ Deputy Governor Shinichi Uchida reassured investors that the bank would not raise rates during periods of market instability. Sakurai praised this statement, emphasizing the importance of market stabilization in the current economic climate.
The BOJ’s decision has drawn scrutiny from Japan’s opposition party, with a parliamentary committee set to question Ueda and Finance Minister Shunichi Suzuki in the coming days. This comes amid unusual political pressure on the central bank, with senior ruling party members weighing in on monetary policy prior to the July decision.
Second-quarter GDP figures are set to be released on Thursday, with analysts expecting a rebound following a previous contraction.
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