A Japanese 10,000 yen banknote is held in Tokyo, Japan, on Saturday, October 7, 2023.
Shoko Takayasu, Bloomberg | Bloomberg Getty Images
Despite the dovish comments of the Prime Minister of Japan Shigeru Ishiba leading to a sharp plunge in the ifCurrency experts are not budging from the Bank of Japan’s long-term policy expectations.
If sliding as low as 147.15 against US dollars Friday, after Ishiba told reporters that the current economic climate does not require an additional rate increase. The currency pared its biggest one-day decline since June 2022 during the session.
“I don’t believe we are in an environment that requires us to raise interest rates further,” Ishiba said on Wednesday after meeting with Bank of Japan Governor Kazuo Ueda – who heads the bank’s rate-setting committee. The prime minister’s comments marked a drastic change in tone compared to his messaging on the recent campaign trail.
“This shift is significant because the prime minister has been a longtime critic of the Liberal Democratic Party administration, including the late Abe Shinzo, whose ‘Abenomics’ is associated with monetary easing,” said Stefan Angrick, senior economist at Moody’s Analytics. .
“My money is still on a rate hike in October,” Angrick told CNBC, noting that the minutes of the BOJ’s most recent meeting were from September still has an optimistic view of the economy.
We won’t rule out another rate hike later this year, but if not, the BOJ will hike in early 2025.
Mazen Issa
fixed income strategy at MRB Partners
The Bank of Japan kept its benchmark interest rate steady at “around 0.25%” – the highest level since 2008 – in September. On July 31, Japan’s central bank raised its benchmark rate from the previous range of 0% to 0.1%. This comes after the BOJ in March raised its policy rate for the first time in 17 years.
When BOJ board members were divided over the future path of interest rates at the September meeting, the board noted that the Japanese economic activity and prices have “generally developed in line with the Bank’s outlook.”
The BOJ is expected to review interest rates next on October 30-31, when it will also provide updated quarterly forecasts for growth and prices. Another meeting is scheduled for December.
Ken Matsumoto, macro strategist at Crédit Agricole CIB, said the market expects the BOJ to raise policy rates again at its upcoming October meeting on the outlook for the economy and inflation. However, he said, Ishiba’s announcement for the General Election to be held on October 27 (which will decide which party is in control of the lower house of parliament) has been thrown off course.
Matsumoto, meanwhile, added that he expects the BOJ to hike at its January meeting next year, not before. Mazen Issa, fixed income strategist at MRB Partners, said the firm “will not rule out another rate hike later this year, but if not, the BOJ will hike in early 2025.”
“We expect that the weakness will be limited,” he said.
When the BOJ raised rates earlier in July, the move triggered the unwinding of the popular yen to trade, which led to a sharp sell-off in the global market. A “carry trade” occurs when an investor borrows in a currency with a low interest rate, such as the yen, and reinvests the proceeds in a currency with a higher rate of return.
USD/JPY every year
Higher interest rates generally lead to a stronger yen, which can affect Japan’s stock market, especially the exporter-dominated index. If the strong makes exports less competitive in the global market.
The BOJ and the government have been operating with greater coordination since the spring, and are now trying to encourage consolidation in the currency after the big yen did unwind, said Issa.
“The underlying story still suggests that the BOJ will hike to 2025, but the timing should depend on three factors,” said Nomura’s Yujiro Goto.
A December rate hike by the BOJ is still possible – but only if it is weakened further, the US avoids a hard landing and the American economy remains stable even beyond the upcoming presidential election in November, Goto told CNBC.
Mizuho’s executive economist, Kazuo Momma, echoed the sentiment.
What the BOJ will do depends largely on the development of the exchange rate, which is materially influenced by the development in the US. “If it remains stable or strengthens, the BOJ will probably wait at least until January 2025,” he said.
