The Bank of Japan (BOJ) Governor, Kazuo Ueda, showed little urgency during a press briefing on Thursday regarding the weakening yen, dampening expectations for any immediate monetary tightening. Earlier in the day, the BOJ maintained its key interest rate at 0.25%, extending the status quo for the third consecutive policy meeting.
The yen is nearing levels last seen during Japan’s intervention in April and May to stabilize its currency against the dollar. However, Governor Ueda downplayed such concerns, stating, “Import inflation is relatively stable on an annual basis.” This lack of immediate action has left markets uncertain about the BOJ’s next move.
Market participants had speculated on a possible rate hike during the BOJ’s two-day meeting, but Ueda emphasized the need for more data. “One of the reasons we were cautious about raising rates this time was that we decided we needed a little more information on the momentum behind wage increases, which the BOJ sees as key to sustaining 2% inflation,” Ueda explained.
Tomoaki Shishido, an interest rate strategist at Nomura Securities, described Ueda’s stance as “extremely dovish,” noting that it reduced the likelihood of a rate hike in the near term. “He did not rule out a rate hike in January, but his remarks suggest the probability is much lower than market expectations,” Shishido told Nikkei Asia.
Some speculate that Ueda’s hesitance might be a strategic move to pressure politicians into requesting a rate hike. Prominent lawmakers, including Prime Minister Shigeru Ishiba, have previously expressed resistance to such measures, given the potential economic repercussions.
The BOJ’s post-meeting statement remained largely unchanged, providing few insights into the decision to hold rates steady. It reiterated that “Japan’s economy will continue to grow at a pace above the potential growth rate due to the gradual intensification of a virtuous cycle from income to spending.” However, the statement highlighted persistent risks, such as “high uncertainties surrounding Japan’s economic activity and prices, including developments in overseas economic conditions.”
Japan’s core inflation, as estimated by the BOJ, has been slowing since late last year, currently hovering between 0.8% and 1.5%. Analysts remain divided on the timing of the next rate hike, with surveys indicating mixed expectations ranging from next month to as late as March.
The yen’s depreciation, exacerbated by the widening interest rate differential between Japan and the U.S., has led to a surge in the cost of imported goods like food and energy. This trend disproportionately affects low-income households and small businesses, intensifying calls for monetary policy adjustments.
On Wednesday, the U.S. Federal Reserve cut its interest rate for the third time this year to a range of 4.25%-4.5%. The move caused the yen to fall as low as 154.70 against the dollar, with some analysts warning it could test a 37-year low of 161 against the dollar in 2024.
The BOJ faces a delicate balancing act as it seeks to normalize monetary policy without disrupting financial markets. The last rate hike in July caused an 8% surge in the yen and triggered an 18% sell-off in Tokyo stocks. Analysts suggest this experience has made Ueda cautious about sudden policy shifts.
Looking ahead, the BOJ is monitoring wage growth and consumer inflation to determine the appropriate timing for any rate hikes. External risks, including a slowing Chinese economy and uncertainty under U.S. President-elect Donald Trump’s proposed tariffs, further complicate Japan’s economic outlook.
