BOJ’s Ueda Sends Clear Hint at Chance of December Rate Hike
(Bloomberg) — Bank of Japan Governor Kazuo Ueda sent the clearest hint yet that his board might increase interest rates soon, highlighting the possibility of a move at the BOJ’s December meeting.
The central bank “will consider the pros and cons of raising the policy interest rate and make decisions as appropriate” by examining the economy, inflation and financial markets at home and abroad, Ueda said Monday in a speech to business leaders in Nagoya, central Japan. Any hike would be an adjustment in the degree of easing, with the real interest rate still at a very low level, he added.
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Kazuo UedaPhotographer: Kiyoshi Ota/Bloomberg
In his afternoon press conference, Ueda emphasized that he’s had smooth communications with the government, an assertion that may indicate Prime Minister Sanae Takaichi won’t object to a move. The premier is known to favor dovish policies, but she may be worried that inflation could further damage the ruling Liberal Democratic Party after two bruising election results that reflected frustration over costs of living.
“I think I’ve had frank, good discussions at face-to-face meetings with the prime minister and economic ministers since last month,” Ueda told reporters at the press conference. “I intend to continue to keep close communications.”
BNP Paribas’ economists wrote in a research note that Ueda’s speech was “almost an advance notice” for a December hike, while economists at Barclays and JPMorgan Securities brought forward their rate hike predictions to this month after previously pegging it for January.
Those sentiments were reflected in market moves. After Ueda’s remarks, traders saw about a 76% chance of a rate hike this month, according to an index of overnight swaps. That’s up from around 58% on Friday, with the likelihood rising to around 94% for a move by January.
Government bonds slumped, with the two-year yield rising to its highest level since 2008, while yields on five-year and benchmark 10-year bonds climbed at least 6.5 basis points each to 1.375% and 1.87%, respectively. The yen rose as much as 0.5% to 155.4 against the dollar.
For some time, BOJ watchers and investors have flagged Ueda’s speech in Nagoya as a possible moment for a signal from the governor. Economists and market players have closely parsed recent central bank communications for any sign that might tip the scales in favor of a hike either in December or January.
“Ueda’s speech just sounds like preparation for a rate hike in December,” said Mari Iwashita, executive rates strategist at Nomura Securities. “He even mentioned the government in a sign that he has already gained its understanding of the move.”
Some ruling coalition members and economic advisers to Takaichi have suggested it might be best for the BOJ to wait until January to avoid sending a mixed message to markets after the government unveiled last month its biggest round of fresh spending measures since the easing of pandemic rules.
Still, continued strength in inflation and weakness in the yen are factors that support the case for an earlier move.
While the central bank repeatedly says it is not targeting any exchange rate levels, it also recognizes that a weaker yen will pump up import costs and put further upward pressure on inflation. Given simmering frustration among voters over persistent price gains, most BOJ watchers expect Takaichi to go along with a BOJ rate hike when the time comes.
By calling attention to a specific policy meeting and a decision on raising interest rates rather than just policy, Ueda is likely indicating the rising possibility of action at that time. Back in January, the governor said the board would decide on whether to hike rates at its upcoming meeting, and the BOJ hiked later that month.
“Raising the policy interest rate under accommodative financial conditions is about the process of easing off the accelerator as appropriate toward achieving stable economic growth and price developments, not about applying the brakes on economic activity,” Ueda said.
The BOJ chief spoke after his fellow board members signaled support for raising rates, and two dissenting members called for the action at the last two meetings. Junko Koeda said that rate normalization should take place without specifying when, and Kazuyuki Masu said in an interview with Nikkei the timing of the hike is approaching. Even dovish member Asahi Noguchi last week mentioned the risk of being too late on any policy change.
Still, some economists took the view that Ueda was continuing to keep his options open while wary of anything that might send the yen into another tailspin.
“Ueda couldn’t afford to sound dovish as that would risk sending the yen to 160,” said Ko Nakayama, chief economist at Okasan Securities and a former BOJ official. “It’s a warning from Ueda, but I don’t think he has tied his hands to December.”
With heightened market expectations for a December move in place, were the central bank not to move this month, that might also risk further criticism of its messaging. Some economists blamed the BOJ for spurring a global market meltdown in August 2024 after it hiked without sufficiently telegraphing the move.
Ueda did sketch out both sides of the timing dilemma in his morning remarks. He pointed to the BOJ’s appropriate policy conduct — moving neither too late nor too early — as an approach that will help the economy grow in a sustainable manner.
Adjusting the degree of accommodation appropriately will be necessary “to guide Japan’s economy on to a long-term growth path, which will ultimately lead to the success of the efforts undertaken by the government and the bank thus far,” Ueda said.
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