Bank of Japan Maintains Interest Rate, Expects Moderate Economic Recovery

Investing.com- The Bank of Japan announced on Friday that it would maintain its current interest rate, pausing increases and expecting a moderate economic recovery. The decision to keep the overnight lending rate target unchanged at 0.25% was unanimous and in line with market consensus.

The announcement led to a slight increase in the yen, which rose by 30 points before falling back to 142.16.

Morgan Stanley has revised its risk outlook on the U.S. dollar to neutral, recommending a long position on the yen against the U.S. dollar and other risk-sensitive currencies. This is due to growing concerns about a potential hard landing in the U.S. economy. The current foreign exchange market is characterized by a “defensive” mechanism, which may lead to a future bear market in the U.S. dollar. Historical trends suggest that going long on the yen is an effective trade in such a scenario.

Wall Street banks predict that the Bank of Japan will raise interest rates in January next year. Goldman Sachs notes that economic data and inflation trends have been in line with expectations since the Bank of Japan raised interest rates in July. Japan’s second-quarter GDP grew by 0.8% quarter-on-quarter, and rising wages have been partially transmitted to service prices. However, it may take time for inflation to rebound, making January next year the “optimal” time for the Bank of Japan to raise interest rates again.

Bank of America Merrill Lynch predicts that the Bank of Japan may raise interest rates to 0.5% in January 2025 and further increase them to 0.75% in the second half of next year. The normalization of policy may depend on the outlook for the U.S. economy.

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