Bank of Japan may need 50-75bp rate hike, Mitsubishi UFJ warns
In brief
- Mitsubishi UFJ's Koguchi warns BOJ may need 50-75bp hike instead of expected 25bp.
- BOJ policy rate at 0.75%, highest in 30 years, with market expecting 1.0% by June end.
- Larger hike could amplify carry-trade unwinds like late July-August 2024 selloff.
The Case for a Jumbo Move
Koguchi suggested that a conventional 25 basis point increase won't be enough. If inflation accelerates, the BOJ could potentially raise rates by 50 or even 75 basis points in a single meeting. Market expectations already point toward a rate increase that would lift the BOJ's policy rate to approximately 1.0% by the end of June 2026, and around 65% of economists anticipate a policy rate increase from the BOJ by month's end.
The BOJ has spent the better part of three decades keeping rates at or below zero, a policy designed to stimulate wage growth and consumer demand in an economy plagued by deflation. That era is ending.
Carry-Trade Risk
The stakes for global markets are substantial. In late July and early August 2024, when the BOJ delivered a modest rate increase, global equity markets including crypto sold off sharply as carry trade unwinds cascaded through risk assets. A 50 or 75 basis point move would amplify that dynamic considerably.
The mechanics are straightforward: when the BOJ raises rates, borrowing yen becomes more expensive, which forces traders and investors who've been funding carry trades with cheap yen to unwind positions. Those positions span global equities, crypto, and risk assets worldwide. A jumbo hike—double or triple the conventional 25 basis point move—would compress that unwinding into a shorter window, potentially triggering sharper dislocations across markets.
