Bank of Japan to raise interest rate three consecutive times? Here's what Nomura is saying

The Bank of Japan could raise interest rates at three consecutive meetings through December in an extreme scenario where yen weakness persists, according to Nomura Securities Co.

A quarter-point increase this month “looks reasonable,” and “it’s possible that we can have back-to-back rate hikes in October and December if the momentum of yen weakness continues toward 160,” head of FX strategy Japan Yujiro Goto said in a Bloomberg TV interview.

Goto’s comments underscore a dramatic shift in expectations for a BOJ that until recently had been moving cautiously in normalizing policy. The yen has rallied more than 2% this week to around 156 per dollar amid growing expectations for faster tightening, as well as speculation over a potential change in the Government Pension Investment Fund’s asset allocation

Overnight index swaps more than fully price a 25-basis-point BOJ hike by September, with another increase fully priced by January. Governor Kazuo Ueda has hinted that a move is possible at the upcoming meeting, while Hajime Takata, one of the bank’s most hawkish board members, has left the door open to an outsized increase as well as back-to-back hikes.

Still, three consecutive increases would represent an unusually rapid tightening pace for a central bank that spent much of the past three decades battling deflation and keeping borrowing costs near zero.

Goto’s baseline is less aggressive. He sees at least one BOJ rate increase per quarter as likely or necessary from here and maintains a dollar-yen target of 154 for now.

The government’s stance toward monetary policy could prove critical to whether the yen’s gains persist, he said. Investors are looking for signals from Prime Minister Sanae Takaichi on whether she supports further BOJ tightening after previously expressing reservations about higher rates.

“If she sounded still negative for rate hikes by the BOJ, the market will be disappointed and the yen may be sold again,” Goto said. By contrast, if Takaichi refrains from weighing in on monetary policy or emphasizes the BOJ’s independence, he sees scope for the yen to strengthen beyond 150 per dollar.

The Federal Reserve could provide another catalyst. Recent comments from Fed officials suggest US policymakers may not be rushing to raise rates in September. If the Fed stays on hold while the BOJ delivers a hawkish message, renewed dollar weakness could push dollar-yen below 155 sooner than investors expect, Goto said.

 

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