2024.04.01 11:34
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UBS: Bank of Japan's interest rate hike probability is 40% in July, 60% in October

UBS believes that the dovish stance of the Bank of Japan may need to be "reassessed," with the expectation that the USD/JPY will reach 150 by the end of this quarter

The general expectation that the Bank of Japan "will not raise interest rates again in the short term" seems to be wavering.

Following Barclays, UBS has also made a relatively aggressive prediction. On March 29, UBS released a research report stating that the Bank of Japan will turn hawkish at its April monetary policy meeting, with the next policy rate adjustment likely to occur in October (60% probability) or July (40% probability).

In terms of exchange rates, the Bank of Japan expects the USD/JPY to fluctuate in the range of 143-155 during the second quarter, and with the assumption of a Fed rate cut and continued low volatility in asset prices, the USD/JPY is expected to remain at 150 by the end of the quarter.

UBS believes that although the market generally perceives the Bank of Japan as dovish, this view may need to be reassessed. Especially considering the possibility of Ministry of Finance intervention in the foreign exchange market and forecasts for future policy rate adjustments. In addition, economic data indicates that the road to recovery for the Japanese economy still requires time and more evidence to confirm.

Next rate cut may be in October or July

In a survey of 47 Bank of Japan watchers by the media, the main viewpoints are divided into three potential rate hike timings: July, October, and after 2025.

UBS believes that while the likelihood of a rate hike at the next April monetary policy meeting is low, UBS expects the Bank of Japan's communication to be slightly hawkish, potentially paving the way for a rate hike in July or even June.

The report predicts that there is a 60% probability that the Bank of Japan will raise rates in October, or a 40% chance of a rate hike in July. Among them, the evidence for a rate hike in October is more solid—relevant data at that time will show a rebound in consumption and a rise in service prices.

We should not be surprised by the upcoming policy rate hikes in the next few months. We believe that the timing to reduce purchases of Japanese government bonds (currently at 6 trillion yen per month) may come earlier than the timing for policy rate hikes.

After a significant decline in industrial production in January, there was a slight fall in February—weak production mainly reflects temporary shutdowns at car factories. On the other hand, real retail sales accelerated, which is a positive signal for consumption.

We continue to expect service prices to rise as wages increase, but it may take some time to confirm the trend reversal. We now forecast that Japan's core CPI and super core CPI for March will be 2.7% and 3.0% respectively.

Japan ready to intervene in forex markets at any time

As mentioned by Wall Street CN earlier, after an emergency meeting held last Wednesday by the Japanese Ministry of Foreign Affairs, the Bank of Japan, and the Financial Services Agency, Japanese Vice Finance Minister Kanda Masato stated, "We do not rule out taking any measures to deal with disorderly foreign exchange fluctuations," implying that the risk of Japanese government intervention in the forex market is increasing UBS believes that the Japanese Ministry of Foreign Affairs is ready to intervene in the foreign exchange market at any time, that is, buying Japanese yen and selling US dollars based on a $1.3 trillion foreign exchange reserve. The report states:

It is expected that the US dollar against the Japanese yen will be at 150 by the end of the second quarter, with a range between 143 and 155. It is worth noting that interest rate differentials are not the only factor affecting currency trends, low volatility is also a necessary condition for successful arbitrage trading