(Bloomberg) — Bank of Japan Governor Kazuo Ueda’s newfound caution and the renewed yen weakness it has sparked risks damaging the logic of his campaign to keep normalizing policy in line with developments in the economy.
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Ueda’s messaging may lose credibility if he ends up raising interest rates largely to protect the yen from further falls instead of moving when economic data supports a hike, according to economists.
Last week’s BOJ meeting was seen by many analysts as an ideal moment to hike rates with inflation, wages and the economy largely tracking the central bank’s forecasts and with the yen showing more resilience against the dollar than last month. Some 86% of economists polled by Bloomberg before the decision said the time was ripe for a move.
Instead, the central bank opted to bide its time. A complicated domestic political situation and uncertainties stemming from Donald Trump’s return to the White House in January were likely among factors that played into the decision. But Ueda’s unexpected signaling that the bank might further delay its next move until March or later prompted a renewed slide in the yen to a five-month low and fresh questions about the BOJ’s communication strategy.
“I wasn’t expecting his remarks to give some kind of commitment to a January hike,” Ryutaro Kono, chief Japan economist at BNP Paribas, wrote in a note. “But I thought he would suggest he is leaning toward a rate hike in the near future, with the intention of warning against a further weakening in the yen.”
With this comments, Ueda was likely trying to avoid getting boxed into a January rate hike. But by giving a weaker signal than traders expected for the possibility of a move next month, he fueled yen weakness that may force him to hike in January for reasons that don’t fully align with his goals.
If he does prefer to wait until spring before moving, the central bank chief will likely be hoping that finance ministry officials can scare the yen bears away for long enough with threats of intervention.
“I’m not sure if yen weakness can be contained until March,” said Daisuke Karakama, chief market economist at Mizuho Bank, “There’s no guarantee the yen won’t break 160 by the January meeting. If they had to move then, that would create the impression that monetary policy is steadily turning into currency policy.”
The yen was as 156.53 against the dollar on Monday morning, after weakening as far as 157.93 on Friday.
Finance Minister Katsunobu Kato warned Friday against speculative currency trading, saying he was “deeply” concerned over the recent yen’s rapid drop against the dollar after it plunged to the lowest level since July. At that point the yen had lost 4.9% since early December and 10.6% since mid-September.
The sequence of central bank and finance ministry comments fits in with a pattern first seen under former Governor Haruhiko Kuroda. The cycle starts with the BOJ chief giving remarks that batter the yen and prompt finance ministry warnings. The cycle continues with the government forking out billions of dollars to prop up the currency before the bank follows up with some rearguard action to help the yen.
When Ueda arrived at the BOJ in April 2023, he brought fresh perspective to the central bank and a mission to normalize policy without upturning markets. He initially exceeded the expectations of BOJ watchers with his ability to smoothly and quickly dismantle Kuroda’s sprawling stimulus apparatus. Before the end of his first full year he managed to scrap yield curve control and abandon negative interest rates and even raise borrowing costs for the first time in 17 years.
But Ueda started to blink in the following months. His remarks in April helped trigger a slide in the yen that prompted currency interventions by the finance ministry. In July, the yen breached 160 against the dollar to nudge the government into further market action that took its intervention bill for the year close to $100 billion. The subsequent rate hike in July was seen largely as a measure to stem further slides.
The move helped spark a global market rout as investors said they had been confused by the central bank’s messaging.
At the same time, the July move also showed it’s easier for the BOJ to raise rates when the yen is weakening as falls in the exchange rate amplify concerns among households and businesses. Ahead of the July move, some senior lawmakers called for a rate hike.
When Ueda recently said a rate hike was “nearing” in a Nikkei newspaper interview at the end of last month, some market participants thought they were getting a clearer signal that a move was looming in December or January. When the BOJ then announced a January speech by one of its deputy governors, that looked like a steer toward the January 23-24 meeting.
Ueda didn’t rule out a January hike at his Thursday briefing and he made clear there is no need to wait for every uncertainty to be resolved, but his comments that it may take time to assess the bigger picture of the wage trend and the impact of US policy, pushed the currency down.
“There was absolutely no sense of trying to avoid the acceleration of a weak yen or a drop in expectations for a rate hike,” Naoya Hasegawa, chief bond strategist at Okasan Securities, wrote in a note Friday.
Ueda will speak again on Christmas Day in a speech that normally wouldn’t bear much significance for investors. But with dissatisfaction growing over his communication approach, this could be an opportunity for him to shine a clearer light on the BOJ’s thinking. Currency traders will certainly be looking out for any sign of adjustment in his tone.
