Former Bank of Japan Official Says No More Interest Rate Hikes This Year

According to information from Makoto Sakurai, a former Bank of Japan (BOJ) board member, the central bank is unlikely to raise its benchmark interest rate again this year.

This decision comes after the significant market disorder caused by the central bank's unexpected rate hike earlier this month.

By ceasing additional interest rate hikes, the bank aims to stabilize the market's volatility, particularly in the remaining months of 2024.

Impact of Bank of Japan's Interest Rate Hike

In an interview with Bloomberg on August 12, Sakurai expressed skepticism about further rate hikes in 2024. He added that even a single rate increase by March 2025 remains uncertain.

The sudden rate hike in early August sent shockwaves through the equities and digital asset markets. The BOJ raised its benchmark rate to 0.25%, surprising many investors and leading to a sharp sell-off.

The yen carry trade, a strategy where investors borrow yen at low interest rates to purchase higher-yielding foreign assets, was particularly affected.

However, the real disruption wasn't the rate hike but the yen's subsequent appreciation in the foreign exchange markets. The USD/JPY exchange rate plunged from around 153 yen per dollar on July 31 to 145 yen per USD, making yen-denominated loans significantly more expensive almost overnight.

The sharp rise in the JPY/USD is causing a massive unwind of Yen carry trade positions and contributing to the sharp decline in US stocks. For those who do not understand how this works, a brief explanation

1) Many traders were borrowing Jap Yen (JPY) at low interest rates,... pic.twitter.com/sfi0Hva56M

- Adam Khoo (@adamkhootrader) August 5, 2024

The global markets felt the impact almost immediately, with the total virtual currency market cap shedding over $500 billion between August 2 and August 5.

This dramatic downturn escalated due to large-scale liquidations of leveraged positions in the crypto market and substantial selling by major players. A prominent example was Jump Trading, which offloaded over $370 million in Ethereum (ETH) during the same period.

Despite the turbulence, Sakurai defended the BOJ's decision to initiate the rate hike, describing it as necessary to normalize Japan's monetary policy.

For nearly two decades, Japan had maintained interest rates between 0% and -0.1%, an era of near-zero interest rates that Sakurai suggested needed to end.

He praised the move to 0.25% as a positive development, though he cautioned that the central bank should adopt a wait and see" approach before considering further hikes.

Cautious Stance on Future Rate Hikes

BOJ officials, including Deputy Governor Shinichi Uchida, have signaled a cautious stance on future rate hikes in the wake of the market disruption.

Uchida, speaking on August 6, emphasized the need to maintain current levels of monetary easing amidst the prevailing volatility in domestic and international financial markets. He stressed that the central bank would refrain from raising rates during market instability.

Meanwhile, the BOJ's recent actions have not gone without criticism. Japan's primary opposition party has voiced concerns over the timing and consequences of the rate hike.

According to a Bloomberg report, due to this issue, a parliamentary committee is set to convene on August 13, shortly after Japan's markets reopen following a public holiday.

The committee will decide when to summon BOJ Governor Kazuo Ueda and Finance Minister Shunichi Suzuki for questioning regarding the central bank's recent policy decisions.

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