Rate hikes may not save the yen? Kazuo Ueda emphasizes "acting cautiously," traders bet the next rate hike may have to wait until September next year.
On December 19, the Bank of Japan raised its policy rate by 25 basis points to 0.75%, but cautious remarks from Kazuo Ueda regarding the policy outlook put pressure on the yen. Despite carrying out the biggest rate hike since 1995, the central bank’s lack of a clear timetable for further hikes has left investors confused about the policy path.
Kazuo Ueda stated at a press conference that the central bank still has room to raise rates further, but the specific magnitude and timing will depend on the evolution of inflation and economic data. Traders were disappointed by the lack of clear guidance on monetary policy from the BOJ, causing the yen to lose ground against the US dollar, falling as much as 1% to 157.38, reaching the lowest level in nearly four weeks.
However, some market observers expect the Bank of Japan’s future tightening pace to remain gradual. Overnight index swaps indicate that the prevailing market consensus is that the next rate hike by the BOJ may occur around September next year.
Vague Policy Guidance Sparks Market Confusion
This rate hike by the Bank of Japan met market expectations, but President Kazuo Ueda’s cautious approach to forward guidance has prompted doubts among investors. According to Bloomberg, a former executive director previously predicted that the BOJ could raise rates as many as four times by 2027.
However, Ueda repeatedly emphasized at the press conference that future policy must be pursued “prudently.” Such vague forward guidance has led the market to question the central bank’s resolve to continue tightening. Rong Ren Goh, fixed income portfolio manager at Eastspring Investments, pointed out: the market fears that “the Bank of Japan may need to increase the magnitude of rate hikes going forward, rather than reduce them, which increases the risk of higher interest rates.” He said:
“If the BOJ does not provide clear guidance or make a commitment on rate hikes, the market may continue to price in the risk of lagging action.”
Political Support Paves Way for Policy Shift
This rate hike received tacit political support. The cabinet led by Japanese Prime Minister Sanae Takaichi has shown a willingness to tolerate modest increases in interest rates, and Chief Cabinet Secretary Minoru Kihara also publicly stated earlier this week that monetary policy decisions should be left to the independent judgment of the central bank.
This political consensus has created policy space for the Bank of Japan to pursue normalization of monetary policy. Earlier this month, BOJ Governor Kazuo Ueda already signaled a rate hike, well preparing market expectations in advance.
However, the market generally expects the BOJ’s future tightening pace to remain gradual. In the absence of clear policy guidance, investors are generally cautious about holding yen long positions over the year-end holiday period.
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