The Bank of Japan may raise interest rates higher! Is there still room for the yen bulls to run?

Mercer LLC expects the Bank of Japan to raise interest rates multiple times in the coming years, so it insists on continuing to increase its underperforming yen positions in multi-asset funds.

Cameron Systermans, the Head of Multi-Asset for Mercer in Asia, stated that the investment advisory firm, which manages $492 billion for external clients, expects the Bank of Japan to raise the benchmark interest rate to 1.5% or higher. Systermans is confident in the Bank of Japan's first rate hike this year and believes this week's policy meeting is live.

In an interview, he said, "We are long on the yen against the US dollar, euro, and New Zealand dollar. This is a negative interest rate position, so the financing cost is higher, but we are very confident in this view and willing to bear the negative interest rate."

Systermans mentioned that since October last year, Mercer's outsourced Chief Investment Officer business unit has held yen long positions in several multi-asset funds, indicating that the company's view on the Bank of Japan is globally consistent.

Mercer expects the Bank of Japan's policy rate to reach 1.5% in the coming years, reflecting its expectation of entrenched Japanese inflation, while the median forecast for the bank's ultimate rate by Bloomberg is 1%.

Systermans said, "We believe the Bank of Japan can achieve its 2% inflation target on a sustainable basis. A benign cycle between wage growth and service price growth is in place, making it sustainable to achieve the inflation target."

The Bank of Japan is set to make its next monetary policy decision on Wednesday. In March this year, the Bank of Japan raised its policy rate for the first time in 17 years, shifting short-term rates from -0.1% to the 0-0.1% range.

The yen held steady on Monday, with the yen posting its best weekly gain since late April last week amid changing rate expectations and stock market sell-offs, but market sentiment remains fragile.

Currently, traders are awaiting the policy decisions of the Bank of Japan and the Federal Reserve on Wednesday for further direction. Speculation about a rate hike by the Bank of Japan this week continues to heat up, supporting the yen's strength, while the Federal Reserve is widely expected to create conditions for a rate cut in September.

Kristina Clifton, Senior Economist and Chief Currency Strategist at the Commonwealth Bank of Australia, stated that the Federal Reserve rate decision is a "major event" and poses a risk to the USD/JPY currency pair. She added, "Any dovish hints from the FOMC could significantly lower the USD/JPY, but a hawkish FOMC may not have a big impact."

Investors also remain vigilant about further geopolitical turmoil, as Israel is weighing how to respond to a deadly rocket attack on the Golan Heights, which Israel and the US blame on the Lebanese armed group Hezbollah.

Shinichiro Kadota, Currency and Interest Rate Strategist at Barclays in Tokyo, said, "Market sentiment remains fragile, and ultimately the US stock market is still key" He mentioned the demand for safe-haven currencies such as the Japanese Yen during last week's stock market crash, adding, "The market trend has always been led by the U.S. stock market, and we need to see if the situation there has stabilized."

Data released last Friday showed that investors significantly reduced their short interest in the Japanese Yen, with the current bearish sentiment at its lowest since February, marking a remarkable turnaround in market sentiment