BOJ Meets With Yen and Ueda’s View on Rates in Focus

The Bank of Japan is widely expected to keep its monetary stimulus unchanged Friday, with traders focusing on any remarks Governor Kazuo Ueda might make on negative interest rates or the correlation between currencies and policy as the yen trades near a 10-month low.

(Bloomberg) — The Bank of Japan is widely expected to keep its monetary stimulus unchanged Friday, with traders focusing on any remarks Governor Kazuo Ueda might make on negative interest rates or the correlation between currencies and policy as the yen trades near a 10-month low.

All 46 economists surveyed by Bloomberg predict no adjustments to the interest rate or yield curve control after the bank tweaked its YCC settings at the last gathering in July.

Ueda will be under scrutiny when he speaks at a post-meeting press conference after remarks he made in an interview earlier this month spurred speculation about an early end to negative rates. Ueda told the Yomiuri newspaper the chances “aren’t zero” that authorities might be able to confirm a virtuous wage-inflation cycle by year-end, a pre-requisite for a rate hike.

Economists will look for hints Friday as to whether that remark was meant to flag a potential hike or merely an attempt to support the yen. 

Japan’s currency weakened to a fresh 10-month low Thursday, with the dollar rising as high as 148.46 after the Federal Reserve held interest rates steady and telegraphed one more increase before year-end in quarterly projections. The weakness prompted Chief Cabinet Secretary Hirokazu Matsuno to warn that Japan wouldn’t rule out any options to curb excessive moves.

Read More: Fed Leaves Rates Unchanged, Signals Another Hike This Year

BOJ watchers moved up their rate increase forecasts after the Yomiuri interview, with half now predicting a hike in the first half of 2024. Markets are pricing in even faster action.

Traders will look for the governor to clarify his comments or discuss the market’s reaction to them. Ueda usually holds a press conference at 3:30 p.m. after the bank releases its policy statement around noon. 

BOJ officials view much of what Ueda said in the interview as consistent with his routine remarks of late, indicating little change to his stance that authorities need to weigh both upside and downside risks in deciding whether to adjust policies, people familiar with the matter told Bloomberg.

Ueda, the first academic to be installed at the helm of the BOJ, has used the phrase chances “aren’t zero” for one topic or another at every post-board meeting news conference since April. In July, he used the phrase in regards to YCC. He said the risks weren’t zero that authorities would have had to scrap the policy had they not made the tweak.

Friday marks the one-year anniversary since Japan’s first yen-buying intervention in 24 years. A year ago, then-BOJ chief Haruhiko Kuroda pledged after a board meeting to continue with easing. That helped fuel a further slide in the yen that prompted the government to buy the currency.

When he speaks Friday, Ueda will have to walk a tightrope to avoid sounding either too dovish or hawkish. If he strongly denies any intention to increase rates, the yen could sag even further even as officials at the finance ministry have stepped up warnings about potential intervention to support the currency.

Treasury Secretary Janet Yellen said earlier this week that the US wouldn’t object to market action as long as it’s aimed at smoothing out market volatility rather than targeting currency levels. 

At the same time, if Ueda sends strong signals on normalizing policy, yields on 10-year government bonds could hover closer to the bank’s de-facto ceiling at 1%, a development that would likely force the BOJ to buy more bonds, exacerbating the side effects of yield control. The 10-year yield touched 0.745% Thursday, the highest since 2013.

“Ueda has a very difficult communication task. He is likely to signal various possibilities so he can keep his hands free,” said Junki Iwahashi, senior economist at Sumitomo Mitsui Trust Bank. “The motive for Ueda to hint at an early rate hike now probably comes from his desire to halt the weakening of the yen.”

What Bloomberg Economics Says…

“We expect Bank of Japan Governor Kazuo Ueda to strike a subtly hawkish tone when he wraps up the two-day policy meeting Friday. That’s not because the BOJ is getting close to a policy pivot. Rather, we think he’ll seek to rein in yen depreciation that’s making it harder to sustain stimulus the economy still needs.”

— Taro Kimura, economist

Click here to read the full report.

What to watch for 

  • Focus will be on whether the decision or any comments by Ueda jar the currency market, raising the prospects for intervention. Implied overnight volatility in the dollar-yen pair climbed to the highest level since July 28, when the BOJ surprised the market by adjusting yield-curve control.
  • The governor has so far given balanced remarks on the currency by mentioning both positive and negative aspects of yen weakness. Close attention will be paid to whether Ueda signals any frustration over the yen’s recent depreciation.
  • How Ueda characterizes the chances of a rate hike in early 2024 will be under close scrutiny. While he is likely to cite the possibilities of moving both early or late, traders will look for any emphasis in either direction.
  • Ueda’s views on the obstacles for a hike will be of interest. Some of Ueda’s fellow board members indicated a higher hurdle for ending the negative rate versus adjusting the YCC. Swap market indicators now show stronger expectations for the near-term scrapping of the subzero rate by March than a further widening of the YCC band.
  • His latest assessment on inflation will be scrutinized by BOJ watchers before the bank releases a quarterly economic report next month. The board meeting comes after national CPI data are set to show inflation above the BOJ target for a 17th month.
  • Some economists foresee another adjustment or scrapping of the YCC coinciding with another upward revision to the inflation projection. Goldman Sachs Tuesday raised its inflation outlook to 3.1% for this fiscal year, widening the gap between its assessment and the BOJ’s 2.5% projection.

–With assistance from Brett Miller.

(Updates market prices)

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