The Japanese yen (^USDJPY) on Thursday soared to a 4-month high against the dollar after comments from Bank of Japan (BOJ) Governor Ueda and comments Wednesday from one of his deputies bolstered speculation the BOJ was close to ending its negative interest rate policy. Market attention will now focus on the December 19 BOJ meeting and whether BOJ Gover Ueda gives any indication of policy changes.
Thursday’s comments from BOJ Governor Ueda to the Japanese parliament jolted financial markets when he said that handling monetary policy "will become even more challenging from the year-end and through next year," stoking speculation that the BOJ would soon end its negative interest rate monetary policy. Ueda’s comments came after BOJ Deputy Governor Himino signaled on Wednesday that the BOJ was inching closer to ending negative interest rates after he laid out a hypothesis for what might happen if rates go positive.
BOJ Governor Ueda, who took over as Governor in April, has maintained a cautious approach and gradually widened the BOJ’s yield-curve control this year. He has kept the BOJ’s ultra-loose monetary policy in place at a time when other major central banks were raising interest rates to control inflation. BOJ officials have said the bank is not yet confident enough about attaining the price goal of stable inflation at 2%, accompanied by wage growth.
Swaps tied to BOJ meeting dates have now priced in an 87% chance the BOJ raises rates at the March 19 meeting and have fully priced in a rate hike at the April 26 meeting. Today's Japanese economic data showed a mixed economic picture that will complicate the BOJ’s attempt to change policy. Japan’s Q3 GDP was unexpectedly revised lower to -2.9% (y/y annualized) from -2.1%, weaker than expectations of -2.0% and the steepest pace of contraction since the pandemic. However, Oct labor cash earnings rose +1.5% y/y, stronger than expectations of +1.0% y/y.
Despite nearly two-thirds of BOJ watchers expecting an end to negative interest rates by April, some believe the BOJ will maintain its slow and steady approach to monetary policy. Former BOJ official Hayakawa thinks market participants have overplayed recent comments from BOJ Governor Ueda and his deputy, as there is no reason to believe the BOJ will scrap its negative interest rate early. Hayakawa, one of very few who correctly predicted the BOJ’s surprise move to adjust yield curve control in July, said the BOJ will most likely wait until its April meeting to decide on ending negative interest rates.
On the date of publication, Rich Asplund did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
