TD Securities: A Hawkish Shift by the Bank of Japan May Weaken the Appeal of Yen Carry Trades

1. TD Securities pointed out in its latest report that as the Bank of Japan shifts to a hawkish policy stance, the yen's appeal as a global carry trade funding currency is expected to gradually decline. Carry trades usually involve borrowing low-interest yen to invest in higher-yielding assets; Japan's rate hikes will narrow the interest rate differential, reducing the profit margin of this strategy.2. The report believes that Japan's economy is at a critical turning point, and the Bank of Japan "cannot afford the risk of falling behind." The institution expects the Bank of Japan to abandon the "gradual" tightening approach and instead take a more proactive path toward policy normalization.3. According to TD Securities' forecast, the Bank of Japan will raise rates by 25 basis points in both September and December, and will continue to raise rates in April, July, and October of 2027, eventually bringing the policy rate up to 2.25%.