Bank of Japan (BOJ) Governor Kazuo Ueda highlighted the effects of the weakening yen on inflation and announced that the possibility of an interest rate hike in December is seriously on the table.
Ueda’s statement, “I want to see some more data on wage increases next year,” and his strong warnings about the weak yen signaled a marked shift in tone in the bank’s monetary policy stance.
Ueda told parliament that the “timing and feasibility” of a rate hike would be discussed in upcoming meetings, a departure from his previous statement that there was “no predetermined plan on timing.” This reversal came as the yen, which has fallen to 10-month lows against the dollar, has increased pressure on politicians.
According to the governor, a weaker yen could push up headline inflation by increasing import costs, and he emphasized that this effect is being felt more strongly than in the past due to companies’ recent more aggressive price/wage increases. The tone is also hardening among BOJ members. Yesterday, BOJ Board Member Junko Koeda said that real interest rates should continue to rise due to “relatively strong price increases.”
Economists believe this succession of hawkish statements makes a rate hike at the December meeting more likely. “The BOJ will likely raise interest rates in December,” said Takeshi Minami, chief economist at the Norinchukin Research Institute. “The government is concerned about the weak yen and would tolerate an increase that would stabilize the exchange rate.”
The rapid depreciation of the yen following the appointment of Prime Minister Sanae Takaichi, a proponent of low interest rates, has prompted the government to reconsider foreign exchange intervention. Finance Minister Satsuki Katayama has stated that they will take steps to stabilize the exchange rate if necessary. This stance is seen as further emboldening the hawkish wing within the Bank of Turkey (BOJ).
The BOJ’s next meeting is scheduled for December 18-19. The central bank has raised interest rates twice this year after exiting its massive stimulus program and has held them steady at 0.5% since January. Market expectations are that the next increase will occur in either December or January.
The BOJ’s interest rate hike in December could create a significant disruption in global liquidity conditions. For years, Japanese investors have been intensively transferring funds to global markets through “carry trades” driven by the low interest rate environment. The loosening of this mechanism could put short-term pressure on risk assets, particularly Bitcoin and the cryptocurrency market.
*This is not investment advice.
