Forex Blog: Currency Trading News & Analysis.

February 11th 2006

Japanese Yen benefits from rate hike speculation

As evidence that Japan has emerged from recession continues to mount, economists and analysts have begun to speculate that the country’s Central Bank will raise rates from their current level of zero. According to the most recent inflation data, Japanese prices have increased for two consecutive months, a feat that had not occurred in nearly a decade. Governors from the Bank of Japan, have themselves hinted that it may be time to stop pumping liquidity into the Japanese economy via an ultra-loose monetary policy. As a result, the consensus is that Japan will begin raising interest rates at the end of this year. Yen bulls have reacted to the prospect of rate hikes with veritable jubilation, arguing that higher interest rates would surely translate into Yen appreciation. The Financial Times reports:

Although the BoJ is not expected to end its zero interest rate policy until next year, any pre-emptive rise in borrowing costs could reduce the use of the yen as a funding currency for the infamous carry trade. This would allow the currency, which most strategists view as undervalued on a fundamental basis, to appreciate.

Read More: Yen climbs on hopes of BOJ policy shift

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