Several statements by the Bank of Japan, including by Governor Ueda, have strongly shaken the currency market. Deputy Governor Himino said ending the negative interest rate policy would have only a limited impact on the economy and Governor Ueda met the Prime Minister yesterday, highlighting the importance of sustainable wage growth and inflation, which led to a fairly rapid change in market sentiment. betting on the tightening of the Bank of Japan’s policy. Dollar weakness is also partially supporting the yen’s sudden move, especially ahead of today’s release of US nonfarm payrolls data.
It seems that the Bank of Japan is paving the way for a gradual normalization and giving the market a signal that the moment is near. However, since these comments were made outside the BoJ meeting, no sudden major policy changes are expected this month. Yes, we remember that Governor Kuroda surprised the market with a yield curve control tightening last December, but we think it is unlikely that Governor Ueda will adjust the policy without prior communication. Therefore, we expect some changes in Governor Ueda’s statement and dialogue at the BoJ meeting on December 18-19.
As we have argued previously, we believe that the Bank of Japan’s rate hike will occur in 2Q24, most likely at its June meeting. By then, the BoJ will be able to confirm a solid pay increase with Shunto’s results. In terms of inflation, it will trend lower early next year, but core inflation excluding fresh food is still expected to remain above 2%. Even if the BoJ carries out a rate hike, we believe the Bank’s JGB buying operation will continue to avoid a rapid rise in long-term yields.