The U.S. Federal Reserve's recent dovish turn offers temporary relief to the Bank of Japan (BOJ) in managing the yen's weakness, yet it adds complexity to Japan's path of raising interest rates, especially as divergent policies between the two central banks may unsettle global markets.
At the annual Jackson Hole symposium in Wyoming, Fed Chair Jerome Powell announced on Friday that "the time has come" to reduce interest rates due to increasing risks to the job market. This clear indication of an impending policy easing from the Fed comes at a time when BOJ Governor Kazuo Ueda reaffirmed Japan's intention to continue rate hikes if inflation stays on course to achieve the 2% target.
The yen responded positively, strengthening against the dollar following Ueda's remarks and extending gains after Powell’s comments, as markets anticipated a narrowing interest rate gap between the U.S. and Japan. Derek Halpenny, head of research global markets EMEA at MUFG, noted that "The yen buying today is understandable given Governor Ueda showed very little sign of a shift in the views and plans of the BoJ following the financial market turmoil earlier this month."
For the BOJ, the yen's recovery provides some respite from the political pressure to address its depreciation, which has been inflating the cost of imported goods and burdening consumers. However, the BOJ’s strategy to raise rates remains fraught with uncertainty, especially as Japan's approach contrasts with the global trend toward rate cuts. This divergence could lead to significant volatility in Japan's currency and stock markets.
The central bank is already exercising caution after market disruptions followed its surprise rate hike in July. Ueda highlighted on Friday that the BOJ would remain vigilant to market developments, acknowledging that significant market swings could influence policy decisions if they impact inflation forecasts.
Adding to the BOJ's challenges is the domestic political landscape. Prime Minister Fumio Kishida, who appointed Ueda, is set to step down, with his successor to be determined by a ruling party leadership race in September. While most leading candidates support the BOJ's moderate rate hike approach, it remains uncertain whether a new leader would endorse higher borrowing costs, especially if market volatility dampens corporate profits.
Makoto Sakurai, a former BOJ board member, expressed skepticism about the likelihood of another rate hike this year, citing the unstable political situation. "Until the domestic political situation stabilizes, the BOJ might find it hard to raise rates," Sakurai said, ruling out a bold move by the central bank in the near term.
While a Reuters poll indicated that most economists expect the BOJ to raise rates again this year, many see December as a more likely timeframe than October. The central bank’s previous rate hike and Ueda's signals of future hikes had already jolted financial markets, prompting a cautious response from the BOJ's deputy, who assured that no additional hikes would occur until markets stabilize.
Despite the market turmoil, Ueda's remarks suggest that the BOJ remains committed to its long-term plan of gradually increasing borrowing costs. Sources close to the BOJ's thinking emphasized that while the central bank may not rush into further hikes, it is unlikely to be swayed from its inflation-focused strategy.
However, some analysts question the robustness of Japan's economy, noting that while consumption improved in the second quarter, rising living costs continue to strain household sentiment. The potential impact of a U.S. slowdown on Japanese exports further complicates the economic outlook. Sayuri Shirai, an academic at Keio University, observed, "From an economic perspective, there's little reason for the BOJ to raise rates," pointing to the ongoing weakness in domestic demand.
As the BOJ navigates these challenges, the interplay between global economic conditions, market stability, and domestic political developments will be crucial in determining its future policy direction.
(Source:www.japantimes.co.jp)
At the annual Jackson Hole symposium in Wyoming, Fed Chair Jerome Powell announced on Friday that "the time has come" to reduce interest rates due to increasing risks to the job market. This clear indication of an impending policy easing from the Fed comes at a time when BOJ Governor Kazuo Ueda reaffirmed Japan's intention to continue rate hikes if inflation stays on course to achieve the 2% target.
The yen responded positively, strengthening against the dollar following Ueda's remarks and extending gains after Powell’s comments, as markets anticipated a narrowing interest rate gap between the U.S. and Japan. Derek Halpenny, head of research global markets EMEA at MUFG, noted that "The yen buying today is understandable given Governor Ueda showed very little sign of a shift in the views and plans of the BoJ following the financial market turmoil earlier this month."
For the BOJ, the yen's recovery provides some respite from the political pressure to address its depreciation, which has been inflating the cost of imported goods and burdening consumers. However, the BOJ’s strategy to raise rates remains fraught with uncertainty, especially as Japan's approach contrasts with the global trend toward rate cuts. This divergence could lead to significant volatility in Japan's currency and stock markets.
The central bank is already exercising caution after market disruptions followed its surprise rate hike in July. Ueda highlighted on Friday that the BOJ would remain vigilant to market developments, acknowledging that significant market swings could influence policy decisions if they impact inflation forecasts.
Adding to the BOJ's challenges is the domestic political landscape. Prime Minister Fumio Kishida, who appointed Ueda, is set to step down, with his successor to be determined by a ruling party leadership race in September. While most leading candidates support the BOJ's moderate rate hike approach, it remains uncertain whether a new leader would endorse higher borrowing costs, especially if market volatility dampens corporate profits.
Makoto Sakurai, a former BOJ board member, expressed skepticism about the likelihood of another rate hike this year, citing the unstable political situation. "Until the domestic political situation stabilizes, the BOJ might find it hard to raise rates," Sakurai said, ruling out a bold move by the central bank in the near term.
While a Reuters poll indicated that most economists expect the BOJ to raise rates again this year, many see December as a more likely timeframe than October. The central bank’s previous rate hike and Ueda's signals of future hikes had already jolted financial markets, prompting a cautious response from the BOJ's deputy, who assured that no additional hikes would occur until markets stabilize.
Despite the market turmoil, Ueda's remarks suggest that the BOJ remains committed to its long-term plan of gradually increasing borrowing costs. Sources close to the BOJ's thinking emphasized that while the central bank may not rush into further hikes, it is unlikely to be swayed from its inflation-focused strategy.
However, some analysts question the robustness of Japan's economy, noting that while consumption improved in the second quarter, rising living costs continue to strain household sentiment. The potential impact of a U.S. slowdown on Japanese exports further complicates the economic outlook. Sayuri Shirai, an academic at Keio University, observed, "From an economic perspective, there's little reason for the BOJ to raise rates," pointing to the ongoing weakness in domestic demand.
As the BOJ navigates these challenges, the interplay between global economic conditions, market stability, and domestic political developments will be crucial in determining its future policy direction.
(Source:www.japantimes.co.jp)
