Bank of Japan will take longer to hike rates given the yen's rapid strengthening, BMI says

The Bank of Japan will adopt a more cautious approach to hiking interest rates to avoid rapid appreciation in the yen after the recent global market turmoil, Fitch Solutions' BMI said in a recent note.

"We expect that the BoJ will take a more cautious approach and only hike by 25bps this year to 0.50%, down from our previous view for 50bps," said BMI's analysts in a note on Wednesday. 

Interest rate hikes by the BOJ led to the unwinding of the popular yen carry trade, which led to a sharp sell-off in global markets last Monday.

Japan's benchmark Nikkei 225 plunged 12% to record its worst day since 1987. The benchmark has since made a sharp recovery and is well past its level prior to last Monday's rout.

Carry trades refer to operations wherein an investor borrows money in a currency with low interest rates, such as the Japanese yen, and invests it in higher-yielding assets. The trading strategy has been gaining traction in recent years.

A weaker yen has helped prop up its stock market, and its rapid strengthening could lead to higher volatility.

Following market turbulence, BOJ's Deputy Governor Uchida Shinichi released a statement affirming that the bank would not raise its policy rates amid market instability.

For 2025, BMI forecasts that the BOJ will only be able to hike by 25 bps as the Fed is expected to cut rates by about 200 bps to 3% next year. This implies that the BOJ will be limited when it comes to the magnitude of its hikes as it could result in a much stronger yen, BMI said. 

"This implies that the interest rates will end 2025 at 0.75%, which would be below the BoJ's terminal rate of 1.00%," the note added.

On July 31, Japan's central bank lifted its benchmark rate to "around 0.25%" from its previous range of 0% to