LONDON (Kyodo) The Bank of Japan is expected to increase its key interest rate target from the current 0.5 percent to 1 percent by the end of 2007 and to 2 percent by the end of 2008, with a further rise to 2.5 percent over the next two years, a report released Wednesday predicted.

The global outlook, published by the Economist Intelligence Unit, the business information arm of the weekly British-based Economist magazine, forecast the BOJ’s aggressive monetary tightening despite markets anticipating otherwise.

“As Japanese rates rise more sharply than currently expected by markets, most of the remaining carry trades will be unwound, leading to a substantial back flow of funds into Japan,” the report said.

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