Market traders bet on 70% chance of Bank of Japan raising interest rates in July

Investors have increased bets on the Bank of Japan raising interest rates in July after it unexpectedly reduced its bond purchases as part of regular operations this week.

Investors have increased their bets on a rate hike by the Bank of Japan in July after the Bank of Japan unexpectedly reduced its bond purchases as part of its regular operations this week.
The overnight index swap rate (OIS) puts the chance of the Bank of Japan raising interest rates in July at around 70%, up from around 50% earlier this month.
The shift in market positions comes at a time when the yen is facing downward pressure due to the wide interest rate differential between the United States and Japan.
Expectations are also rising that the Bank of Japan may announce a broader reduction in bond purchases at its June meeting before raising interest rates in July.
The yen was steady in Tokyo on Wednesday while Japanese bonds were muted. Yields on 20- and 30-year bonds recently climbed to their highest levels in a decade.
The benchmark 10-year Treasury yield is near 0.975%, the highest since 2013.
Christopher Willcox, head of trading at Nomura Holdings Inc., said on Wednesday (15th) that the 10-year Treasury yield \”could exceed 1% at some point\” because inflation is likely to remain high.
Willcox added that the yen could still rise to 140 against the dollar this year on expectations that the Bank of Japan may announce \”limited tightening\” in October.
The dollar was trading at about 156.38 yen as of 1 p.m. in Tokyo.
Investors are divided on the outlook beyond July.
One market indicator suggests traders expect the Bank of Japan to raise interest rates just once more this year after raising rates in March.
However, Pimco expects to raise interest rates three more times this year.
Ales Koutny, head of international rates at Vanguard Group Inc., expects rates to rise to about 0.75% by the end of the year.
Goldman Sachs Group Inc. expects the Bank of Japan to raise interest rates twice a year until rates reach 1.25%-1.5%.
Some investors believe the Bank of Japan will not raise interest rates significantly because companies accustomed to ultra-low borrowing costs will cut spending.
Others argue that ignoring rate hikes could lead to further depreciation of the yen, pushing up import costs.

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