Japan GDP, wage data lock in expected BOJ rate hike

A double dose of positive economic data on Tuesday reinforced expectations that the Bank of Japan will raise interest rates at its September 17-18 meeting, with markets now pricing in a near-certain probability of a 25 basis point hike that would lift the policy rate to 1.25%.

GDP Revised Higher, Wages Post Strongest Gain in Years

Japan's second-quarter gross domestic product grew at an annualized rate of 1.4%, revised up from an initial estimate of 1.1%, according to a Cabinet Office report released Tuesday. The figure fell short of the median economist forecast of 1.8% but nonetheless cleared a key hurdle for the central bank's tightening plans.bloomberg

Separately, government data showed real wages rose 2.4% in July from a year earlier, the biggest increase since May 2021 and the seventh consecutive month of gains. Nominal wages jumped 4.7%, the fastest pace since January 1997, while base salaries climbed 4.1%, their strongest showing since April 1992. A labour ministry official attributed the gains to steady nominal wage growth and relatively mild inflation.economictimes.indiatimes

Swap markets are now pricing in a 97-98% probability that the BOJ will hike rates to 1.25% next week, with a further increase to 1.5% in January already fully priced in.finance.yahoo+1

BOJ Expected to Stick With Incremental Moves

Despite speculation about a larger 50 basis point increase — fueled partly by hawkish comments from board member Hajime Takata — people familiar with the central bank's thinking told Reuters the BOJ has little appetite for an outsized move. Governor Kazuo Ueda said last week that economic conditions were moving roughly in line with projections, suggesting inflation risks have not heightened enough to justify a bigger hike.wkzo

"Doing a 50-point hike could be seen as a sign of the BOJ's desperation and put the market's focus on the risk of it being behind the curve," said Nobuyasu Atago, a former BOJ official now at Rakuten Securities Economic Research Institute ↗ 0.00%. The BOJ is instead considering speeding its pace of hikes to roughly once a quarter, Reuters reported, citing sources who spoke on condition of anonymity.wkzo

Yen Rally Upends Carry Trade

The data releases accelerated a rally in the yen, which firmed to 152.89 per dollar on Tuesday — its strongest level since February and a sharp reversal from around 160 less than a week earlier. The surge is triggering an unwinding of the popular carry trade, in which investors borrow yen cheaply to invest in higher-yielding assets. Cross-border yen borrowing had ballooned to a record 360 trillion yen ($2.35 trillion) as of March, according to a Jefferies ↘ 0.87% analysis of Bank for International Settlements data.finance.yahoo

"The carry trade still works, but it is no longer a free lunch. It now comes with a political risk premium," said Masahiko Loo, senior fixed-income strategist at State Street ↘ 0.17% Investment Management in Tokyo. Analysts warn that if the BOJ confirms a hawkish stance and signals further hikes ahead, USD/JPY could push toward the mid-140s — but if the tone disappoints, the yen's gains could reverse just as quickly.investinglive+1