(Jan 23): Bank of Japan (BOJ) governor Kazuo Ueda stuck to his even-handed stance on the central bank’s rate-hike path after holding the benchmark steady and raising the inflation outlook, with his comments helping nudge the yen lower before it rebounded abruptly.
The BOJ left its policy rate unchanged on Friday at 0.75%, according to a statement, as it takes time to assess the impact of last month’s increase and awaits the outcome of a snap election that may affect the nation’s spending plans. The stand-pat decision was forecast by all surveyed economists and leaves borrowing costs at the highest level in three decades.
A raft of upward revisions to price forecasts and a dissenting vote in favour of a rate hike from board member Hajime Takata gave the stand-pat decision a hawkish feel, but Ueda’s reluctance to give a clear signal that an early rate hike was possible invited a slide in the yen to around 159.23 before a sudden strengthening surge took it to 157.37. The yen later pared those gains to hover around the 158 mark after further warnings on the currency from Finance Minister Satsuki Katayama.
While Ueda had suggested that overall inflation will weaken below 2% soon, he also left open the possibility of an early rate hike.
“April is a month where there’s relatively high numbers of price revisions,” Ueda said. “We have a certain amount of interest in that, and while it’s not the most important factor in deciding the next rate hike, it’s one of the factors.”
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Even after the BOJ’s rate hike in December, the yen had been hovering near levels where the Finance Ministry intervened on multiple occasions in 2024, leaving the currency vulnerable to any dovish remarks from Ueda.
“I see a rising chance of a rate hike in April,” said Yoshimasa Maruyama, the chief market economist of SMBC Nikko Securities. “The BOJ projected its confidence through its outlook. This is a hawkish hold.”
Prime Minister Sanae Takaichi’s decision to call an early election and her pledge to suspend a sales tax on food purchases has put downward pressure on the currency and roiled bond markets this week as investors fret over the implications of more fiscal expansion under an emboldened premier.
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That’s left the yen close to levels where the Finance Ministry intervened repeatedly in 2024, with Ueda’s comments then pushing it well into the 159 range. The sudden upward move in the currency initially resembled an intervention but was less than 2 yen in scale and didn’t extend, leaving doubts over what exactly happened and raising the possibility that the volatile moves came down to jittery investors or twitchy algo platforms.
Katayama declined to answer if her ministry had intervened, in keeping with a strategy of keeping market players in the dark over the government’s actions to create doubt for speculators.
The Japanese currency already hit a fresh 18-month low of 159.45 earlier this month after the initial reports that Takaichi would call an election. A victory that solidifies her coalition majority in Parliament might give her more scope to proceed with expansionary fiscal policy, an outcome that may put further pressure on the yen and longer-term yields.
Takaichi’s tax proposal came after the premier last month pushed through Parliament a JPY17.7 trillion (US$112.0 billion or $143.1 billion) economic stimulus package that included provisions to lower costs for utilities and gasoline. In its latest quarterly outlook report, the BOJ upgraded price projections despite those measures, as the steps are expected to boost underlying inflation over the long term.
In its latest quarterly outlook, the bank revised up four of six of its inflation projections and reiterated its intention to raise borrowing costs if its outlook materialises.
“Looking at the upward revision to inflation, I think the recent yen depreciation is having an effect and I see the rate hike path continuing,” said Harumi Taguchi, the principal economist of S&P Global Market Intelligence.
Ueda also touched on the heightened significance of the yen as the central bank gets closer to its inflation goal.
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“Inflation has been rising overall and underlying inflation has been gradually increasing and moving closer to 2%,” Ueda said. “So we need to pay close attention even to relatively small movements in the yen, even if they are of a similar magnitude to those seen in the past.”
The more bullish outlook indicates that Ueda’s board is very much on track for another rate hike after lifting the policy rate last month to the highest since 1995. Board member Takata’s insistence on the need for back-to-back moves showed that not everyone on the board is convinced by the pace Ueda is moving on rates.
“By proposing a hike to 1% now, Takata raises the question of whether the currently expected pace of increases roughly once every six months needs to be accelerated,” said Chotaro Morita, the chief strategist of All Nippon Asset Management.
The BOJ gave other signs of a more robust view, too. It softened its assessment of economic risks as they are now generally balanced. With the negative impact of US tariffs receding, the bank cut the wording that it needs to watch if the economic outlook will materialise “without any preconceptions”.
Parliament was dissolved around lunchtime on Friday, paving the way for the shortest election campaign on record as Takaichi tries to capitalise on her elevated support ratings.
Takaichi’s pledge to cut the sales tax on food equates to a JPY5 trillion move aimed at relieving pressure on households struggling to deal with the impact of inflation, especially rising food prices.
While the BOJ is keen to cultivate stable inflation after decades of weak prices and deflation, the cost of living crunch and the weak yen have become a key frustration for voters.
A report earlier in the day showed inflation excluding fresh food slowing to 2.4% on the impact of some of the government’s past and present subsidy programs. The report showed food prices rose 5.1% in December from a year earlier. It also showed that inflation has averaged above the BOJ’s 2% target in the last four calendar years.
Takaichi’s tax proposal roiled financial markets on Tuesday, pushing up longer term yields to the highest levels in decades.
While senior government officials including Katayama called for calm that day, the BOJ refrained from commenting or taking any action to help reassure investors. Yields have since fallen back towards earlier levels.
Ueda said the central bank may conduct operations to smooth volatility in the bond market in a nimble fashion if needed, while indicating that exceptional circumstances would be needed.
“In a situation that’s different from usual, we could conduct nimble operations to encourage stable yield formation in the markets,” Ueda said. “We will keep closely cooperating with the government and keep watching the situation while considering our respective roles.”
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