Japanese Core CPI Above Expectations, Beware of Yen Carry Trade Hot Money Exodus

Original Article Title: "Japan's Core CPI Higher Than Expected, Rate Hike in December? Beware of Yen Carry Trade Hot Money Flight Echoing August Stock Market Crash"

Original Article Author: DaFi Weaver, BlockTempo

The Japanese Ministry of Internal Affairs and Communications today released the Consumer Price Index (CPI) data for October, which showed:

· The core CPI (excluding fresh food prices) rose by 2.3% year-on-year, slightly higher than the market's expectation of 2.2%, but a decrease from September's 2.4%. This change is mainly attributed to the base effect of last year's government cut in fuel subsidies.

· The CPI index excluding fresh food and energy prices had a year-on-year growth rate of 2.3%, higher than September's 2.1%, indicating that demand-driven inflationary pressure continues to exist.

· Additionally, the annual growth rate of service prices increased from 1.3% in September to 1.5%, reflecting that businesses may be passing on the rising labor costs to consumers.

These data show that Japan's inflation rate remains above the Bank of Japan's 2% target, providing a rationale for the central bank to raise rates next month.

Rate Hike in Japan Next Month?

The Bank of Japan will hold its interest rate decision meeting on December 18th to 19th. According to a survey by the London Stock Exchange, as of November 22nd, 55% of economists predict that the Bank of Japan may raise rates by 25 basis points at this meeting, increasing the benchmark policy rate from 0.25% to 0.5%.

Marcel Thieliant, Director of Economic Research for Asia Pacific at Capital Economics, also believes that there is a high likelihood of a BOJ rate hike. He stated:

"With potential inflation rising again, coupled with a recent rebound in consumer spending and the continued weakness of the yen, the BOJ has ample motivation to hike rates next month."

Furthermore, according to the Bank of Japan's latest Summary of Opinions, if price and economic performance meet expectations, the BOJ may raise the policy rate to 1% in the second half of the 2025 fiscal year at the earliest. However, BOJ Governor Haruhiko Kuroda did not provide a clear indication of the timing of the rate hike. He stated that as long as the Japanese economy remains driven by strong domestic demand and steady wage increases, and can stably achieve the price target, the BOJ is prepared to hike rates again.

Many economists expect that if the BOJ does not raise rates at the next meeting, it may choose to raise the benchmark rate in January next year. Bloomberg economists further predict that the BOJ may hike rates by 1 basis point each in January, April, and July next year, forming a tighter monetary policy path.

Yen Carry Trade Faces Margin Call Risk

If the Bank of Japan decides to raise interest rates next month, it will be the second action following the rate hike in July this year. In September, the Bank of Japan decided to keep the interest rate unchanged, citing key factors such as global economic uncertainty, financial market volatility, and the strengthening of the yen.

In particular, the financial market's volatility is still fresh in memory. Looking back to early August after the rate hike in July, the global capital markets experienced a bloodbath, with one major reason being a wave of margin calls by yen carry traders.

The logic behind the yen carry trade is to borrow yen in Japan's low-interest environment and invest in high-yield assets. However, when Japan raises interest rates:

· The borrowing cost increases, narrowing the profit margin of the carry trade.

· At the same time, a rate hike usually leads to the yen appreciating, further increasing the exchange rate risk of the carry trade.

Under this dual pressure, many carry traders chose to close their positions, causing a liquidity crunch in the market as funds were withdrawn, leading to a market collapse.

Today, with the Bank of Japan potentially raising interest rates again next month, the market has already begun to reflect this expectation. For example, following today's data release, the yen-to-dollar exchange rate briefly appreciated by 0.4% during the trading session. If the rate hike materializes, the yen may strengthen further, and the global capital markets must be closely monitored at that time.

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