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The yen weakened past ¥157 against the dollar on Thursday after Bank of Japan governor Kazuo Ueda said the central bank needed “one more notch” of information before committing to its next interest rate rise, as uncertainty swirled around Japanese wage growth and Donald Trump’s impending presidency.
Ueda’s comments at a press conference followed the BoJ’s announcement that it was holding short-term interest rates at 0.25 per cent.
That decision had been widely forecast, but many economists had expected a firm indication of a rate rise at the BoJ’s next meeting in January. The absence of such a signal sent the yen tumbling against the US dollar, from about ¥155 at the start of his press conference to more than ¥156.6 by the time it ended.
The Japanese currency later fell past ¥157.1, its lowest level since July.
Ueda said the central bank was seeking greater clarity on Japanese wage growth as well as how Trump’s fiscal, trade and immigration policies would affect global financial markets. But such insights would take some time to emerge, he said.
“Needless to say, [on] both Japan’s wage outlook and the impact of Trump’s policies, [it will] take a long time to grasp the entire picture,” said Ueda, noting that Japan’s underlying inflation was also “very moderate”.
The BoJ final monetary policy meeting of 2024 was further complicated by the US Federal Reserve’s move on Wednesday to cut rates by a quarter of a percentage point while signalling a slower pace of rate cuts next year.
The Japanese central bank policy board’s decision was not unanimous, with Naoki Tamura, a former executive at Sumitomo Mitsui bank, calling for interest rates to rise to 0.5 per cent, arguing that “risks to prices had become more skewed to the upside”.
The two-day meeting also included an extensive review of Japan’s monetary policy history over the 25 years since the economy fell into deflation. The BoJ ended its eight-year experiment with negative interest rates in March before raising rates to 0.25 per cent in July, a move that roiled currency and equity markets.
The 212-page analysis concluded that the most intensive period of monetary easing — when the central bank under former BoJ governor Haruhiko Kuroda targeted 2 per cent inflation and undertook a series of unconventional policy experiments — “did not have as large an upward effect on prices as originally expected”.
The review found that large-scale monetary easing also had the side-effect of damaging the functioning of the Japanese government bond market. “Attention should be paid to the possibility that the negative effects could become larger in the future,” the report concluded, warning of “the possibility that the functioning of the JGB market does not fully recover”.
On Thursday, Ueda said that the BoJ would not rule out unconventional monetary policies in the future.
Economists had initially expected a rate rise going into the December meeting, though by this week a majority anticipated the BoJ would wait until January. But some warned that the decision to put off further rises until 2025 risked signalling to markets that Ueda’s push to “normalise” monetary policy was losing momentum.
“In kicking the can further down the road, the risk is that the market begins to doubt the BoJ’s broader commitment to policy normalisation,” said Benjamin Shatil, senior Japan economist at JPMorgan.
Stefan Angrick, head of Japan economics at Moody’s Analytics, said the latest run of economic data had left the BoJ with limited options.
“The domestic economy isn’t strong enough for significant rate hikes, but maintaining the status quo risks further yen depreciation and higher inflation,” said Angrick. He warned that ambiguous communication would tie the monetary policy outlook to foreign exchange market fluctuations.
https://www.ft.com/content/7e6ecad7-5e7f-4db2-ad93-f8c0c79114f1
