"High city trading" ignites the market; Kazuo Ueda maintains his stance: As long as inflation meets the target, rate hikes will continue.

Bank of Japan Governor Kazuo Ueda made it clear on Wednesday that despite sharp market fluctuations driven by speculation over an early election, the central bank will continue to raise interest rates when conditions permit, and its monetary policy path has not changed.

"If our outlook materializes, we will continue to raise interest rates and adjust the extent of monetary easing according to improvements in the economy and inflation," Kazuo Ueda said at a New Year’s meeting hosted by the Regional Banks Association of Japan in Tokyo. This was his first public statement after speculation about Prime Minister Sanae Takaichi calling an early election heated up.

Ueda’s remarks were highly consistent with those he made last week, signaling that the central bank has not wavered due to financial market volatility. Currently, the market is experiencing the "Takaichi trade"—the Nikkei 225 Index surged more than 1% on Wednesday, briefly surpassing 54,000 points, while the yen fell below the 159 mark against the dollar, reaching its weakest level since July 2024.

Most economists expect the Bank of Japan to hold steady at its January 23 policy meeting, with many predicting the next rate hike may be around June. The depreciation of the yen raises import costs, potentially complicating Ueda's aim for stable price growth.

The Central Bank Maintains Rate Hike Stance

Ueda conveyed the central bank’s policy intentions clearly in his Wednesday statement. He stressed that "wages and inflation may continue to rise gradually," and noted that "modestly adjusting monetary easing will help us achieve our price target smoothly and promote long-term economic growth."

Last month, the Bank of Japan raised its benchmark interest rate to 0.75%, the highest level since 1995. Although most observers expect the pace of rate hikes to be roughly every six months, some analysts believe the weakening yen may prompt the central bank to act sooner.

Ueda said Japan's economy will continue to recover moderately in 2025. With the country’s key price indicators exceeding or staying at the central bank's 2% target for over three and a half years, persistent inflationary pressures support further rate hikes.

Election Expectations Trigger Market Volatility

Sanae Takaichi is expected to dissolve the House of Representatives next week to pave the way for an early general election. This would be her first time presiding over a nationwide election since taking office as prime minister last October.

The market anticipates Takaichi may use this opportunity to push for more expansionary fiscal measures, prompting investors to bet that a victory for the LDP will clear the way for large-scale fiscal stimulus. This week, Japanese stocks soared, government bonds and the yen weakened, and the "Takaichi trade" swept across Japanese assets.

The yen depreciated to its weakest level since July 2024, when Japan's financial authorities intervened to support the currency. On Wednesday afternoon in Tokyo, the yen traded around 159.20 against the dollar.

Rising Inflationary Pressure Increases Policy Challenges

A weaker yen pushes up import costs, intensifying inflationary pressures. This dynamic may complicate Ueda’s goal of achieving stable price growth.

Japan's key price indicators have stayed at or above the central bank's 2% target for three and a half years, reflecting persistent inflationary pressure. In this context, further yen depreciation could force the central bank to re-evaluate the timing of rate hikes.

Despite market volatility and political uncertainty, Ueda’s statements show that the Bank of Japan remains committed to gradually exiting ultra-loose monetary policy to achieve sustainable price stability and economic growth.

Risk Warning and DisclaimerThe market has risks; investments should be made cautiously. This article does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article suit their particular circumstances. Investing based on this information is at your own risk.