The Bank of Japan (BOJ) left monetary policy unchanged earlier today in a 8-1 vote. The only dissenter was Takata once again as he proposed raising the policy rate to 1.00% instead. Dissent highlights inflation risk
The language in the policy statement isn’t anything that stands out. The BOJ continues to retain its stance in waiting to see how wage developments will progress next before pushing for the next rate hike. However, the recent sharp decline in the Japanese yen has definitely made things more complicated for the central bank.
For one, Takaichi’s government and fiscal plans are working against the BOJ in wanting to push for further rate hikes. And with the prime minister set to consolidate power via the snap election, it’s again putting pressure on the BOJ to keep playing ball to support her economic and fiscal objectives.
But even so, that is putting heavy downside pressure on the Japanese yen currency. And if verbal intervention isn’t helping, there has to be some course of action next from Tokyo officials.
Actual intervention from the Ministry of Finance would help in the short-term but unless the fundamentals change, it will be tough to convince markets of a material change to the outlook for the currency.
As such, the BOJ might be forced to take action in order to stem the bleeding in the currency instead. For now, they’re not hinting much at that and not really showing the appetite to want to do so. But if Ueda & co. wants to work out a compromise to raise interest rates, this might be the perfect excuse to get it done.
I don’t expect Ueda to be explicit about the situation today and to say that the central bank could step in to raise rates just for the sake of boosting the currency. That would be bad form to do so.
But in any case, market players will be listening carefully to any subtle messaging on that front. So, pay close attention to what Ueda has to say later
