The prominent deputy governor of the Bank of Japan downplayed the likelihood of a short-term increase in borrowing costs by stating on Wednesday that the central bank will not raise interest rates when markets are erratic.
BOJ Won’t Raise Rates When Markets Unstable, Deputy Governor Says
The BOJ unexpectedly raised interest rates last week, and Governor Kazuo Ueda’s hawkish statements were in stark contrast to Shinichi Uchida’s remarks, which pushed the currency considerably down and lifted Japan’s Nikkei share average.
According to Uchida, if the recent high level of market volatility has an impact on the BOJ’s forecasts for prices and the economy, as well as the possibility that Japan will sustainably meet its 2% inflation target, then it might “obviously” alter the trajectory of rate hikes.
“As we’re seeing sharp volatility in domestic and overseas financial markets, it’s necessary to maintain current levels of monetary easing for the time being,” Uchida said in a speech to business leaders in the northern Japanese city of Hakodate.
Uchida, a prominent central banker who is regarded as the driving force behind the BOJ’s policy decisions, stated at a press conference following the speech, “In my opinion, more factors are emerging that call for us to exercise caution when hiking interest rates.”
The comments followed last week’s indications from Governor Ueda that there would be additional rate increases, which some traders attributed to a significant unwinding of yen carry trading.
“Uchida’s dovish comments balanced out the governor’s hawkish tone last week,” said Hiroshi Kawata, senior economist at Mizuho Research & Technologies.
“Market volatility is so high now that it won’t subside soon, which means the hurdle for an October rate hike is now quite high,” he said.
According to Uchida, the recent strengthening of the yen will have an impact on the BOJ’s policy decisions since it lessens the pressure on import prices to rise and, consequently, overall inflation.
He continued by saying that stock market volatility would impact company activities and consumption, which would in turn alter its decisions.
“Unlike U.S. and European central banks, we’re not in a situation where we would end up being behind the curve unless we hike interest rates at a set pace,” Uchida said.
“We won’t raise interest rates when financial markets are unstable,” he said in the speech.
In response to Uchida’s comments, the dollar shot up to a session high of 147.50 yen and was last up 1.8% at 146.84. The yield on the 10-year Japanese government bond (JGB) decreased by 1 basis point to 0.875%.
After a 10% increase on Tuesday, the Nikkei average (.N225) opened higher, indicating that investors were regaining stability following the recent market meltdown that saw the index fall 13% on Monday.
To gradually phase out a decade of unprecedented stimulus, the BOJ hiked interest rates to levels not seen in 15 years last week and revealed a comprehensive plan to decrease its vast asset purchases. Indicating the possibility of consistent rate increases in the upcoming years, Governor Ueda stated that the BOJ will continue raising rates if the economy and prices follow its projections.
The hawkish comments contributed to a worldwide market meltdown that saw the yen jump and Japan’s Nikkei average plummet on Monday, along with disappointing U.S. labour statistics that fueled fears of a recession in the largest economy in the world.
Since then, traders have reevaluated the timing and tempo of potential rate hikes by the BOJ, which has caused market volatility.
Uchida added that although the United States is expected to achieve a gentle landing, Japan’s economy is anticipated to continue recovering and emphasized the necessity to maintain a loose monetary policy for the time being.
Additionally, he stated that he was unsure of the maximum amount that the BOJ could ultimately hike interest rates.
“Uchida’s comments are dovish. Unless market sentiment recovers rapidly, the chance of the BOJ hiking rates either in September or October is low,” said Toru Suehiro, an economist at Daiwa Securities.
“But if U.S. recession fears subside around year-end, the BOJ will likely raise rates in December,” he said.
