Global markets are closely watching policy decisions from the US Federal Reserve and Bank of Japan (BoJ) this week, with investors increasingly focused on the pace and limits of further monetary tightening amid persistent inflation and elevated energy prices.
Howe Chung Wan, Head of Asian Fixed Income at Principal Asset Management, said further rate increases by the BoJ remain justified, although current market expectations may have become too aggressive.
He noted that markets are pricing in around 3.5 to four rate hikes over the full BoJ tightening cycle, potentially including two more increases by the end of the year, with a terminal rate of around 2%.
Howe said the key issue is no longer whether the BoJ will tighten, but how quickly it will do so, adding that aggressive expectations are creating potential opportunities in longer-duration bonds.
“The bigger story could be the yen, where there has been a clear shift in sentiment as investors reassess the BoJ’s hiking cycle and capital begins to reallocate towards Japan,” he said.
He identified the 150–155 range for USD/JPY as a key area to watch as markets recalibrate expectations around both the BoJ and Fed policy outlook.
On the Federal Reserve, Howe said the latest strong inflation reading has left policymakers with limited room for manoeuvre, making another rate hike possible.
However, he cautioned that further monetary tightening risks placing greater pressure on economic demand at a time when higher prices are already weighing on consumers and businesses.
Higher oil prices, he said, effectively act as a tax on economic growth by raising costs for households and capital expenditure.
Howe added that higher interest rates would do little to address supply-driven inflation from energy markets, while placing greater strain on rate-sensitive sectors and potentially widening divergences across the economy.
“Even if the Fed does hike, the limits of how much higher prices and tighter financial conditions the economy can absorb are becoming increasingly important,” he said.
The policy signals from both central banks are expected to have implications for global bond yields, currency markets and broader risk sentiment, particularly as investors reassess the balance between persistent inflation and the risk of weaker growth.
