Bank of Japan: Ready to raise rates for the first time?

Over the past few years, the Japanese yen has been the favored currency to sell for carry trades because of its zero interest-rate policy. For the first time in seven years, however, the BOJ is considering increasing its interest rates, which could begin for many traders what might be a long and painful exodus out of short-yen carry trades. Any interest rate changes, however, are not expected until much later this year at the earliest because of the battle between the BOJ and the Japanese government.

The BOJ feels the economy may be ready for a rate hike soon because deflation seems to be fading away. The Japanese government, however, wants to hold on to the additional stimulus that is currently in the economy because it believes the economic recovery is still fragile (and it know its popularity is tied to the economy’s growth and stability). Prime Minister Junichiro Koizumi is slated to leave office in September, and perhaps his departure will pave the way for a rate hike. Either way, this change could mark a significant shift in currency direction, but again, it probably will not come until the latter part of this year at the earliest.