BoJ opinions back faster hikes, one sees neutral rate ‘considerably above 1%’

Bank of Japan policymakers' views, as reported in the headline, lean toward accelerating interest rate increases, with at least one member judging the neutral policy rate to sit considerably above 1%. The transmission channel runs through rate expectations and the yen: a higher perceived terminal rate narrows Japan's policy gap with the United States and other major economies, which tends to support the yen and dampen the appeal of carry trades funded in Japanese yen. Exposure is broadest across the Japanese government bond curve, where longer-dated yields reprice upward as the policy path shifts, and across yen crosses, particularly USD/JPY, where positioning built on the wide rate differential is most vulnerable to unwinding. Global risk assets with heavy yen-funded leverage could also see knock-on volatility if funding costs rise. Traders will be watching the next Bank of Japan policy meeting and the accompanying outlook report for confirmation of the pace of hikes, alongside national CPI data for signs of whether underlying inflation is sustaining the case for tightening.

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