Former BOJ official warns of rapid rate hikes as yen weakens
In brief
- Former BOJ official Tsutomu Watanabe warns of potential rapid rate hikes this year
- BOJ benchmark rate could exceed 2%, up from current 1% level
- Japanese yen depreciated 60% since early 2021, down 3% year-to-date
- Faster hikes could trigger unwinding of yen-funded bets across bonds, tech stocks, and crypto
Rate Pressure and Yen Weakness
The official BOJ benchmark rate is currently at 1%, the result of recent tightening moves. But borrowing costs are already climbing elsewhere. The 10-year benchmark government bond yield hovers above 2.8%, the highest in at least three decades, signaling market expectations for further BOJ action.
The yen itself tells a story of sustained depreciation. It has depreciated by 60% to 162.36 per U.S. dollar since early 2021. This year alone, the yen has dropped 3%, adding urgency to rate-hike conversations in Tokyo.
Market Implications
Faster potential interest rate hikes by the BOJ may put a floor under the yen, or potentially lift it higher. That matters because a sustained rally in yen could trigger an unwinding of bullish bets across advanced nation government bonds, tech stocks and crypto funded by years of cheap borrowing in yen.
But recent market moves complicate that theory. The yen and bitcoin have shown strong positive correlation, with both falling against the dollar in lockstep. A yen rally might not unwind crypto positions the way traditional finance models predict.
Fiscal Concerns
There's another risk. Rapid rate hikes might worsen Japan's already fragile fiscal position, an argument made by several economists. Japan carries one of the world's highest debt-to-GDP ratios. Rising rates increase the cost of servicing that debt, creating a policy bind for the BOJ between inflation control and fiscal sustainability.
