Bank of Japan (8301.T) Governor Kazuo Ueda provided the clearest suggestion yet that his board would boost interest rates soon, underlining the prospect of a move at the BOJ’s December meeting.
In an address to business executives on Monday in Nagoya, central Japan, Ueda stated that the central bank "will consider the pros and cons of raising the policy interest rate and make decisions as appropriate" by looking at the domestic and international financial markets, inflation, and the economy.
He continued, "Any increase would be an adjustment in the degree of easing with the real interest rate still at a very low level."
In his afternoon press conference, Ueda underlined that he’s had smooth talks with the government, a remark that may signal Prime Minister Sanae Takaichi won’t object to a move.
Although the premier is known to support dovish policies, she might be concerned that inflation could further harm the ruling Liberal Democratic Party in the wake of two devastating election outcomes that expressed dissatisfaction with living expenses.
Ueda told reporters during the press conference, "I think I've had frank, good discussions at face-to-face meetings with the prime minister and economic ministers since last month." "I plan to maintain close communication."
Ueda's statement was "almost an advance notice" for a December raise, according to a research note from BNP Paribas' economists. Meanwhile, economists at Barclays and JPMorgan Securities moved their rate hike projections from January to this month.
Market movements echoed those feelings. An index of overnight swaps showed that traders perceived a 76% probability of a rate hike this month following Ueda's comments. That’s up from roughly 58% on Friday, with the chance climbing to around 94% for a change by January.
Government bonds fell, with rates on five-year and benchmark 10-year notes climbing at least 6.5 basis points each to 1.375% and 1.87%, respectively, while the two-year yield reached its highest level since 2008. In relation to the dollar, the yen increased by as much as 0.5% to 155.4.
Investors and observers of the BOJ have long pointed to Ueda's speech in Nagoya as a potential signal from the governor.
Recent central bank announcements have been keenly examined by economists and market participants for any indication that could tilt the scales in favor of a hike in December or January.
According to Nomura Securities executive rates strategist Mari Iwashita, "Ueda's speech just sounds like preparation for a rate hike in December." "He even made reference to the government, indicating that he has already gained its comprehension of the action."
Following the government's announcement last month of its largest wave of new expenditure measures since the relaxation of pandemic regulations, several members of the ruling coalition and Takaichi's economic advisers have advised that it could be prudent for the BOJ to hold off until January in order to avoid sending a confused message to markets. However, the case for an earlier move is supported by the yen's weakening and the ongoing strength of inflation.
While the central bank frequently insists it is not targeting any exchange rate levels, it also acknowledges that a weaker yen will push up import costs and put more upward pressure on inflation.
The majority of BOJ observers anticipate that Takaichi will support a BOJ rate increase when the time comes because to voters' simmering dissatisfaction over ongoing price increases.
Ueda is probably signaling the increasing likelihood of action at that time by drawing attention to a particular policy meeting and a decision to raise interest rates rather than just policy. The BOJ raised rates later that month after the governor stated in January that the board would determine whether to do so at its next meeting.
According to Ueda, "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."
The BOJ chief responded after two dissident board members demanded the measure at the previous two meetings and his other board members indicated support for boosting rates.
In an interview with Nikkei, Kazuyuki Masu stated that the time of the hike is getting closer, while Junko Koeda stated that rate normalization should occur without saying when.
Asahi Noguchi, a dovish member, even brought up the danger of changing policy too late last week. However, several economists believed that Ueda was keeping his options open while being cautious about anything that could cause the yen to plummet once more.
According to Ko Nakayama, head economist of Okasan Securities and a former BOJ official, "Ueda could not afford to sound dovish as that would risk sending the yen to 160." "I don't think Ueda has tied his hands to December, but it's a warning."
If the central bank doesn't act this month, there could be more criticism of its messaging given the increased market expectations for a December decision. A global market crisis in August 2024 was attributed by some experts on the BOJ's rise without any warning.
In his morning remarks, Ueda did outline all sides of the time conundrum. He cited the BOJ's proper policy conduct moving neither too early nor too late as a strategy that will support sustainable economic growth.
In order "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 stated that the degree of accommodation must be suitably adjusted.
