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Hiroshi Watanabe, a former top currency diplomat in Japan, suggested that the Bank of Japan (BOJ) might increase interest rates twice more this year if inflation persists at current levels.
According to Reuters, this action could help bolster the Japanese yen and prevent it from hitting new lows. Watanabe, who has maintained close contact with current policymakers, shared his insights with Reuters, indicating that interventions in the foreign exchange market are only effective in reducing excessive market volatility, not in maintaining a specific exchange rate level.
Watanabe explained that the central bank’s policy rate could be raised from the current 0.5% to 1% by the end of the year, which would narrow the interest rate gap with the United States. This adjustment is expected to maintain the yen within a range of 140-150 against the dollar, shifting from the current range of 150-160. He emphasized that if inflation remains around 3%, questions may arise about the appropriateness of keeping the policy rate at 0.5%.
In 2022, the BOJ exited an extensive stimulus program and initiated rate hikes, with the most recent increase to 0.5% occurring in January this year. The central bank has indicated its readiness to further raise rates if the economy continues on a moderate recovery path. A private survey indicated that most economists anticipate another rate hike to 0.75% later this year, with some predicting a rise to 1%.
In contrast, the U.S. Federal Reserve has held its policy rate steady at 4.25%-4.50% since a cut in January, with traders betting on a hold until at least September before any further reductions. Watanabe argued against central banks setting a fixed terminal interest rate, citing fluctuating economic conditions and the changing ideal level of rates.
The Japanese government and central bank have faced political pressure to address the weak yen and the resulting increase in living costs through a combination of yen-buying interventions and interest rate hikes. In July, Japan spent 5.53 trillion yen ($36 billion) on market interventions to support the yen, which coincided with a rate hike to 0.5%.
Watanabe, who served as vice finance minister for international affairs from 2004 to 2007, currently presides over the Institute for International Monetary Affairs. His comments come as Japan grapples with the challenges of a weak currency and rising inflation. The dollar was trading at 151.850 yen on Tuesday.
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