Bank Of Japan To "Wait And See" After Rate Hike Causes Market Disruption

Former BOJ board member Makoto Sakurai predicts that the Bank of Japan (BOJ) would hold off on more interest rate rises for the rest of the year after the economic upheaval generated by its recent surprise increase.

With ambiguity even around the likelihood of another increase before next March, Sakurai said Bloomberg on Aug. 12 that it is doubtful the central bank would raise its benchmark rate once more this year. The BOJ’s move to up the rate to 0.25% earlier this month caused a significant sell-off in both stocks and bitcoin markets, therefore underlining the precarious situation of world financial markets.

The Yen Carry Trade, in which investors borrow in yen at low interest rates to invest in higher-yielding foreign assets, was rocked by the unexpected rate climb. However, the actual driver of the market instability was the later rise in the value of the yen, which saw the USD/JPY exchange rate decrease from about 153 yen per dollar to 145 over a few days.

The effects were felt all throughout the cryptocurrency market, where between Aug. 2 and Aug. 5 almost $500 billion was erased from the whole market capitalization. The market fell more severely with the rate increases, crowded leverage positions, and large sell-off from companies like Jump Trading.

Sakurai said that while the rate rise disrupted the market, it was a required action for Japan, whose interest rates had been between 0% and -0.1% for 17 years. Before thinking about any rate increases, he advised the BOJ to now “wait and see” how things turn out.

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Declaring on Aug. 6 that the central bank will not raise rates during times of financial market volatility, BOJ Deputy Governor Shinichi Uchida also expressed a wary attitude. Uchida underlined the importance of maintaining present degrees of monetary easing in view of extreme volatility in both home and international markets.

The move of the BOJ has attracted criticism from Japan’s biggest opposition party, which resulted in a parliamentary committee hearing on Aug. 13 wherein BOJ Governor Kazuo Ueda and Finance Minister Shunichi Suzuki are likely to be questioned.

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