Turbulent Markets: Bank of Japan Stays on Course Despite Growing Risks

The majority of Bank of Japan (BOJ) observers are maintaining their interest rate forecasts despite the historical market turbulence of recent days. A recent Bloomberg survey of 34 economists shows that 65% expect an increase in the key interest rate from the current 0.25% by the end of the year. While 21% of the surveyed experts predict a hike in October, 41% see December as the likely timing. These assessments are consistent with an earlier survey from August 1, shortly after the BOJ's rate hike and immediately before the subsequent market disturbances. Interestingly, the majority of economists remain confident that the BOJ will maintain its current interest rate policy despite significant market fluctuations and a strengthening yen. However, 71% of analysts consider the likelihood of the BOJ revising its policy as increased. Some attribute the recent rise in the yen to the rate hike on July 31, which is also said to have triggered the historic plunge in Japanese stocks. Others, however, dispute this causality, reflecting a divided opinion among economists. While 56% believe the rate hike was not premature, 32% consider it premature. Yuichi Kodama from the Meiji Yasuda Research Institute views the current volatility calmly: "The market will calm down sooner or later. I do not believe this will have significant impacts on the BOJ's interest rate course, but the risk of negative scenarios has certainly increased compared to before." On Tuesday, the market losses reduced, and the yen gave back some of its gains against the dollar, while politicians called for calm. Some analysts see political factors as the cause of the rate hike, which occurred shortly after unusual statements by two senior lawmakers on monetary policy. Masamichi Adachi from UBS Securities explains: "The rate hike in July is not the main cause of the current market disruptions. However, the perception among market participants that the BOJ raised rates due to a weak yen and political pressure has complicated future policy management and increased the risk of another failed normalization attempt." The main opposition party has already called on Governor Kazuo Ueda to explain the recent rate decision before parliament. After the rate hike, Ueda said the bank would continue to raise rates as long as inflation remained in line with the BOJ's expectations. The governor has so far not publicly responded to the market turmoil. In the long term, interest rate forecasts remain stable. The median value for the year-end is still seen at 0.5%, and the endpoint of the current rate hike cycle remains unchanged at 1%.