While the market awaits the next catalyst from the Middle East, institutional money eagerly awaits the next signal from Tokyo.
The Bank of Japan (BOJ) is meeting today and tomorrow to discuss the next policy move. While the consensus is to hold rates unchanged, the jitters are about what happens next.
Untangling the Carry Trade
For decades, Japan has been the anchor of ultra-loose monetary policy. Now, even a modest tightening threatens to unwind one of the largest and least appreciated sources of leverage underpinning global markets — the yen carry trade.
“The BOJ will stand pat this time but deliver a hawkish message with an eye on a rate hike in June or July,” Tetsuya Inoue, executive economist at Sony Financial Group, said according to Reuters.
“Corporate price-setting behavior has changed, so the BOJ must keep an eye out for signs of second-round effects,” he added.
Meanwhile, ING Think’s research still sees a risk of a hike tomorrow, “if the BoJ gives priority to preventing inflation expectations from accelerating.” In a note from April 24, the bank suggested that “energy shocks …
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