BOJ’s Steady Rates and Ueda’s Dovish Comments Drive Yen Weaker – Yahoo Finance

December 19, 2024

(Bloomberg) – Dovish comments from Bank of Japan Governor Kazuo Ueda hinting at the possibility of raising interest rates in March led to a weaker yen after the Bank of Japan left its monetary policy settings unchanged.

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Ueda said Thursday that the Bank of Japan needs more information about Japan's wages and President Donald Trump's policies before deciding to raise interest rates. His comments at a press conference after the decision caused the yen to depreciate by as much as 1.3% against the dollar.

Japan's currency has already fallen after the central bank kept its benchmark interest rate unchanged at about 0.25%, an outcome that more than half of economists polled by Bloomberg expected.

The Bank of Japan chief said the full picture on wages will become clearer by March or April, but it may take time to fully understand the impact of US President-elect Donald Trump's policies. Ta. Expectations for rate hikes have already faded in recent weeks, with the yen falling for a sixth straight day through Monday, its longest slide against the dollar since June.

With this comment, the Governor appears to be seeking to ensure that the debate over the timing of the next interest rate is a choice between January and March, rather than being crammed into next month's decision.

Mr. Ueda is looking for the right time for a third rate hike, as recent economic data shows inflation is trending in line with the Bank of Japan's forecasts, a precondition for raising interest rates. Since taking the helm of the central bank, the governor has sought to normalize monetary policy after years of experimentation, a mission strengthened by a lengthy policy review announced on Friday that emphasized the importance of interest rates.

Toru Suehiro, chief economist at Daiwa Securities, said in front of Ueda's reporters, “If they wanted to, they could have raised interest rates this time, and there is a high possibility that they will raise rates in January as well.'' “The Bank of Japan chose to wait and see, in part because it wants to see what the economic policies of the new U.S. administration will be.”

Director Naoki Tamura proposed raising interest rates to 0.5%, but voted against the decision to keep rates unchanged. He said the economy and prices were performing as expected, with upside risks to inflation rising. Although his proposal was rejected by the rest of the board, his proposal suggests the board may be preparing for another rate hike.

The TOPIX erased a loss of as much as 1.4% earlier in the day to trade 0.2% lower after the US Federal Reserve (Fed) cut interest rates on Wednesday but revised down its forecast for a rate cut in 2025. Finished.

The Bank of Japan may also have been reluctant to raise interest rates in December given the potential for a poor outlook. Prime Minister Shigeru Ishiba's minority government is currently negotiating with opposition parties, which are wary of raising rates early, to secure support for next year's annual budget.

There are also memories of past failures. Japan has raised interest rates three times in a calendar year since 1989, and economists have cited the tightening as one of the factors that led to the bursting of Japan's asset bubble.

People familiar with the matter told Bloomberg earlier this month that in the lead-up to the meeting, Bank of Japan officials said there was little cost to delaying the next rate hike because the chances of inflation accelerating rapidly were limited. He said he thought it wouldn't cost anything. Some officials did not oppose a proposed rate hike this month, the people said, suggesting a hike was coming.

The central bank also reiterated that inflation trends appear to be in line with its target for the second half of the outlook period. The latest Bloomberg survey of economists found January the most popular time for the next interest rate hike.

For longtime BOJ watchers, Mr. Tamura's call for a rate hike is reminiscent of the February 2007 rate hike, when three board members proposed raising borrowing costs at the previous meeting.

The central bank also announced on Thursday the results of a wide-ranging policy review looking back at the past quarter century. The party pointed to the benefits of the large-scale policy experiment under Ueda's predecessor, Haruhiko Kuroda, but warned that its costs must also be considered.

“This review suggests Mr. Ueda's intention not to use unconventional policies by mentioning side effects,'' said Tsuyoshi Ueno, senior economist at the Nissay Research Institute in Tokyo. “This shows that he believes interest rates should be raised to create policy space, as long as economic conditions allow.”

The Bank of Japan's decision ends weeks of intense market speculation. Traders had been pegging the probability of a December rate hike at about two-thirds at the end of last month, but this week their expectations have fallen to less than 20%, making a March rate hike more likely.

The future path for the Bank of Japan remains uncertain. The next policy meeting is scheduled to conclude four days after President Donald Trump takes office in the White House, and uncertainty remains high. The central bank has said it will not raise interest rates if financial markets are unstable.

–With assistance from Yoshiaki Nohara, Ken McCollum, Erika Yokoyama, Brett Miller, and Beth Thomas.

(During the Ueda press conference, the yen depreciated by more than 1%)

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