The dollar-yen exchange rate experienced a rollercoaster ride in the wake of the Bank of Japan’s (BoJ) hawkish comments, delivered just before Fed Chair Jerome Powell’s highly anticipated Jackson Hole speech. During a parliamentary hearing, BoJ Governor Kazuo Ueda reaffirmed the bank’s commitment to raising interest rates should inflation maintain its trajectory toward the 2% target. He emphasized that the recent market turbulence wouldn’t deter the BoJ from its long-term strategy of gradually increasing borrowing costs.
However, Ueda acknowledged that market volatility could influence the BoJ’s inflation forecasts, suggesting that fluctuations in the yen and stock prices will be crucial in determining the timing of future rate hikes. “Markets at home and abroad remain unstable, so we will be highly vigilant to market developments for the time being,” he stated. This stance echoes previous reassurances from the BoJ, where Deputy Governor Shinichi Uchida had pledged not to raise interest rates if market volatility persisted.
The yen, tracked by the Invesco CurrencyShares Japanese Yen Trust FXY, saw a significant surge of roughly 0.8% between 8:00 p.m. ET on Thursday and 2:50 a.m. ET on Friday, before slightly retracting those gains. Japan’s latest inflation report, released on Thursday, revealed that consumer prices rose by 2.8% year-over-year in July 2024, remaining unchanged for the third consecutive month and reaching their highest level since February.
While Ueda acknowledged the importance of monitoring market developments, he also reiterated that the BoJ remains committed to normalizing its accommodative monetary policy if the economy shows clear signs of price convergence towards its target. This commitment suggests that the BoJ will continue gradually raising interest rates from their current ultra-low levels. “Japan’s short-term rates are very low. If the economy is in good shape, they will move up to levels deemed neutral,” Ueda commented, adding that significant uncertainty remains regarding the ultimate destination for interest rates.
The BoJ’s hawkish stance stands in contrast to the anticipated path of the Federal Reserve. On July 31, the BoJ increased its key short-term interest rate by 15 basis points to 0.25% and opted to halve its bond-buying program to JPY 3 trillion starting next year. This decision, combined with unexpectedly weak US economic data, triggered a reversal in the yen-dollar carry trade. Traders who had been betting on interest-rate differentials between the Fed and the BoJ were significantly impacted by the rate reversal and subsequent margin calls.
The next BoJ meeting is scheduled for September 20, just two days after the Federal Open Market Committee (FOMC) meeting. The US central bank is widely expected to lower interest rates, with market-implied probabilities leaning towards a 25-basis-point cut. If the BoJ raises interest rates, it could deliver another blow to the dollar-yen pair, further challenging the resilience of the carry trade.
