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BOJ Set to Lift Rate to 1.0% in June, 1.25% by Year-End
BOJ rate path steepens: June hike to 1.0% and year-end 1.25% per Reuters poll. Yen carry trade unwind intensifies as inflation risks outweigh slowdown fears.
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The Bank of Japan will raise its key rate to 1.0% at its June meeting and follow with another increase to 1.25% by the end of the year, according to a Reuters poll of 24 economists. The survey shows the central bank has grown more wary of inflation risks than the downside hazards to the economy, a shift that carries direct consequences for JPY positioning and the USD/JPY rate spread.
June Hike at 1.0%, a Faster Path
The median forecast calls for a 1.0% rate after the June policy meeting, up from the current 0.5% level set in January. Economists expect a second move in the fourth quarter, taking borrowing costs to 1.25% by year-end. That pace is faster than what many traders had priced in even two months ago, when the consensus leaned toward a single move later in the year.
The Reuters poll, published on June 2, reflects a gathering view that the BOJ sees price pressures as the bigger threat. Japan's core CPI has stayed above the central bank's 2% target for over a year, and the recent run-up in import prices – partly tied to the PPI surge – has reinforced the case for normalisation.
Transmission to USD/JPY and the Carry Trade
The rate path matters most for the yen through the interest rate differential channel. A faster BOJ tightening compresses the spread between US yields and Japanese yields, which is the single largest driver of the USD/JPY exchange rate.
USD/JPY has already moved lower this year as the BOJ raised rates in January. The new poll suggests the downside bias for the pair persists. Carry trades that borrowed cheap yen to fund long positions in higher-yielding currencies now face a higher funding cost. The yen cross rate basket – EUR/JPY, AUD/JPY, NZD/JPY – could see additional pressure as BOJ rate expectations harden.
Traders running short yen positions should watch the June meeting for the BOJ's forward guidance. A hawkish statement would accelerate the unwind. A dovish hold – which the poll puts at low probability – could trigger a short-term bounce in USD/JPY but would probably be sold into.