Bank of Japan may raise interest rates above 2%, warns ex-official

The Bank of Japan (BOJ) may rapidly increase its benchmark interest rate this year, potentially exceeding 2% as the yen declines. Former BOJ official Tsutomu Watanabe, now an economics professor at the University of Tokyo, issued this warning. Currently, the official rate stands at 1%, following recent hikes, while the 10-year benchmark government bond yield is above 2.8%, the highest in three decades. The Japanese yen has depreciated by 60% to 162.36 per U.S. dollar since early 2021 and has dropped 3% this year. Potential interest rate hikes by the BOJ could stabilize or increase the yen's value. There is speculation that a stronger yen might lead to a reduction in bullish positions across government bonds, tech stocks, and cryptocurrencies, which have been supported by years of cheap yen borrowing. However, recent trends show a strong correlation between the yen and Bitcoin, both declining against the dollar simultaneously. Additionally, rapid rate hikes could exacerbate Japan's fragile fiscal situation, according to several economists.