The Bank of Japan’s (BOJ) influential deputy governor, Shinichi Uchida, has indicated that the central bank is unlikely to raise interest rates in the near future due to the current market instability. His remarks, which contrast with Governor Kazuo Ueda’s hawkish statements made last week when the BOJ unexpectedly increased interest rates, have boosted Japan’s Nikkei share average and caused the yen to depreciate sharply.
Uchida emphasized that the intense market volatility witnessed over the past week could significantly alter the BOJ’s rate hike trajectory if it affects the central bank’s economic and price projections and the likelihood of Japan sustainably achieving its 2% inflation target. He stated, “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.”
The recent appreciation of the yen, which counteracts upward pressure on import prices and, consequently, overall inflation, will also impact the BOJ’s policy decisions, according to Uchida. He added that stock market volatility would also influence their choices by impacting corporate activity and consumption.
Uchida clarified, “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.” This statement suggests that the BOJ is not feeling the same pressure to raise rates as other major central banks.
Wall Street’s main indexes rebounded on Tuesday after a dramatic sell-off on Monday, indicating that investors are starting to regain confidence. “We won’t raise interest rates when financial markets are unstable,” Uchida affirmed. Following his remarks, the dollar surged to a session high of 147.50 yen and was last up 1.6% at 146.59. The Nikkei average (.N225) climbed 3%, while the benchmark 10-year Japanese government bond (JGB) yield fell 1 basis point to 0.875%.
“The BOJ hiked interest rates because it didn’t like the weak yen. Now, it appears to be suggesting a pause in rate hikes because it doesn’t like stocks falling,” remarked Takuya Kanda, an analyst at Gaitame.com Research Institute. “If the BOJ is watching markets so much in setting policy, there’s a chance it won’t be able to raise rates that much.”
Last week, the BOJ raised interest rates to levels not seen in 15 years and unveiled a detailed plan to slow its massive bond buying, marking another step towards phasing out a decade of extensive stimulus. Governor Ueda emphasized that the BOJ will continue raising rates if the economy and prices align with its projections, signaling the possibility of steady hikes in the coming years.
However, the hawkish remarks, coupled with weak U.S. labor data that heightened fears of a recession in the world’s largest economy, contributed to a global market rout that sent the yen soaring and Japan’s Nikkei average plummeting on Monday. Since then, markets have fluctuated, partly due to traders reassessing the timing and pace of future BOJ rate hikes.
Despite stressing the need to maintain loose monetary policy for the present, Uchida stated that Japan’s economy is likely to continue recovering, with the United States expected to achieve a soft landing.
“Uchida’s comments are clearly 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 concluded.
