Prologis: Expects the Bank of Japan to raise interest rates this week, with rates likely to reach 1% by the end of the year

According to the Zhitong Finance APP, Zhong Xiaoyang, co-manager of the Polyus Multi-Asset Income Bond Strategy Fund, stated that if there are no significant negative news related to tariffs, the Bank of Japan is likely to raise interest rates at this week's meeting. Given the persistently high wage inflation and a more positive outlook for domestic demand in 2025, the Bank of Japan is very likely to increase interest rates. Polyus expects this to be the first rate hike of 2025, followed by gradual increases, with the policy rate expected to rise to 1% by the end of the year. The policy rate may also exceed 1%, as it approaches the lower bound of the Bank of Japan's neutral interest rate range.

Looking ahead, Polyus pointed out that the Bank of Japan may consider tapering its balance sheet after the June meeting and re-evaluate its bond-buying program. After hedging currency risks, Japanese government bonds have become more attractive compared to other sovereign bonds. However, due to the opposite policy direction of the Bank of Japan compared to other central banks, the performance of Japanese government bonds may lag behind that of other sovereign bonds.

As the Bank of Japan gradually raises interest rates to more restrictive levels, the yield spread between short-term and long-term Japanese government bonds may also narrow, but the change is expected to be relatively slow. Meanwhile, due to concerns over excessive government spending, investors may demand a higher premium for holding longer-term government bonds.

Additionally, the movement of the yen is mainly influenced by the interest rate differential with the United States. Currently, the yield on U.S. government bonds is a major external factor. Given that the significant adjustments in the U.S. government bond market reflect inflationary pressures from tariffs and U.S. growth outperforming other economies, the likelihood of a sharp depreciation of the yen in the short term is low. Polyus expects the yen to enter a consolidation phase, and if the Bank of Japan signals a potential rate hike, there is an opportunity for the yen to appreciate.

Polyus further noted that Japanese officials have indicated that the volatility of the yen is quite high, but the likelihood of large-scale foreign exchange market intervention is low. As U.S. inflation may rise later this quarter, coupled with sustained economic growth, the market may further adjust this year's rate cut expectations, putting upward pressure on yields, thereby pushing the dollar against the yen to rise again. Investors should also be aware that there may be significant changes in trade policy and that the Federal Reserve may pause its rate-cutting pace, making the dual risks to this year's economic growth more pronounced than in 2024. Therefore, Polyus expects the actual volatility of the dollar against the yen to remain high in 2025