A former Bank of Japan official has signaled the central bank could raise interest rates twice by March, a move that would likely strengthen the yen and trigger turbulence in global markets. The official’s assessment adds to growing expectations that Japan’s long era of ultra-loose monetary policy is ending. If realized, the hikes would ripple through carry trades — where investors borrow cheap yen to buy higher-yielding assets — and could increase volatility in stocks, bonds, and currencies worldwide.
Why the BOJ may act
The former official’s projection rests on the BOJ’s desire to normalize policy after years of negative rates. Inflation has stayed above the bank’s 2% target for months, and the economy has shown enough resilience to absorb gradual tightening. Two quarter-point increases would bring the key rate to around 0.5% by March, still low by historical standards but a meaningful shift from the current near-zero level. The official didn’t name specific dates, but the timing aligns with the BOJ’s January and March meetings.
Impact on carry trades
A stronger yen is the immediate concern for global investors. When the yen rises, the value of carry-trade profits shrinks, and many traders rush to unwind those positions. That selling pressure can cascade: yen buys back, further boosting the currency. The former official noted that such unwinding could “increase market volatility, especially in risk assets.” Emerging-market currencies and speculative debt are particularly exposed. Even a moderate yen rally could force hedge funds and institutional investors to dump riskier holdings, amplifying swings in equity and commodity markets.
Risk assets — from tech stocks to cryptocurrencies — have benefited from the cheap yen that fueled borrowing and speculation. Rate hikes threaten that dynamic. Higher Japanese rates also make yen-denominated bonds more attractive, drawing capital out of higher-yielding foreign markets. The former official’s warning comes at a time when global markets are already jittery about inflation, central bank policies, and geopolitical tensions. The BOJ’s moves could add a new layer of uncertainty.
Investors are now watching for any hints from BOJ Governor Kazuo Ueda and his board. The next policy decision is due in December, and the tone of that statement will be scrutinized for clues about the pace of tightening. The former official’s view is just one forecast, but it underscores a growing consensus that Japan’s monetary stance is turning a corner. How quickly that turn happens — and how markets react — remains the open question.
