DBS Sees 25bps Rate Hike as Likely from Bank of Japan

DBS Group Research economist Ma Tieying expects the Bank of Japan (BoJ) to raise interest rates by 25 basis points at its September 17-18 meeting. According to her, a hike is almost certain given solid Gross Domestic Product (GDP), wage, and inflation data. The recent GDP figures confirmed that the economy continued to grow at an on-trend pace of 1.4% QoQ saar in the second quarter, while July's wage data surprised with a 4.7% year-over-year increase.

The most likely outcome is for the BoJ to deliver a hawkish 25bps hike while signalling a flexible pace of rate hikes at future meetings, DBS believes. However, Ma Tieying warns that an outsized 50bps hike or back-to-back rate hikes are unlikely and could trigger renewed Japanese Yen (JPY) carry-trade unwinding and market volatility.

The risk of carry-trade unwinding and excessive market volatility should not be underestimated if the BoJ were to surprise markets this time, Ma Tieying emphasized. She cautions that the unexpected rate hike in July 2024 triggered a massive JPY carry-trade unwinding and jitters across global financial markets.