Bank of Japan Governor Kazuo Ueda emphasized the impact of a weaker yen on inflation and announced that the possibility of raising interest rates in December is being seriously considered.
Governor Ueda's statement that he would like to see more data on next year's wage growth rate and his strong warning against a weaker yen signaled a marked change in the tone of the Bank of Japan's monetary policy stance.
Ueda told parliament that the “timing and feasibility” of raising interest rates would be discussed at a future meeting, a departure from earlier statements that there was “no predetermined plan for timing.” The reversal came as the yen fell to a 10-month low against the dollar, increasing pressure on politicians.
A weaker yen could push up headline inflation through higher import costs, the governor said, stressing that this impact is being felt more strongly than in the past due to companies' recent more aggressive price and wage hikes. Even among Bank of Japan members, the tone has hardened. Yesterday, Bank of Japan board member Junko Koeda said real interest rates should continue to rise due to “relatively strong price increases.”
Economists believe the flurry of hawkish comments has increased the likelihood of a rate hike at the December meeting. “The Bank of Japan is likely to raise interest rates in December,'' said Takeshi Minami, chief economist at the Norinchukin Research Institute. “The government is concerned about the yen's depreciation and will tolerate a strong yen that would stabilize the exchange rate.”
The government is being forced to reconsider its foreign exchange intervention due to the rapid depreciation of the yen since the inauguration of Prime Minister Sanae Takaichi, who supports low interest rates. Finance Minister Satsuki Katayama said that measures will be taken to stabilize the exchange rate as necessary. This stance is seen as further emboldening the hawkish factions within the Bank of Türkiye (Bank of Japan).
The Bank of Japan's next meeting is scheduled for December 18-19. The central bank has raised interest rates twice this year after exiting a massive economic stimulus program and has kept them at 0.5% since January. The market expects the next interest rate hike to be in December or January.
The Bank of Japan's interest rate hike in December could cause significant disruption to global liquidity conditions. For many years, Japanese investors have intensively transferred funds to global markets through “carry trades” against the backdrop of a low interest rate environment. A loosening of this mechanism could put short-term pressure on risk assets, especially the Bitcoin and crypto markets.
*This is not investment advice.
