In response to significant financial market turmoil in Japan, Deputy Governor Shinichi Uchida of the Bank of Japan (BOJ) has delivered a robustly dovish message, pledging to abstain from raising interest rates during periods of market instability. This commitment, made in the wake of historic volatility, triggered a notable weakening of the yen against the dollar, a surge in bond futures, and an immediate rebound in stock prices following Uchida’s remarks—his first public statement since the BOJ’s rate hike on July 31.
Addressing a gathering of local business leaders in Hakodate, northern Japan, Uchida emphasized the necessity for the central bank to maintain its current monetary easing stance in light of the exceptionally volatile conditions prevailing in both domestic and international financial and capital markets.
The recent rollercoaster ride in Japanese stock markets, marked by plunges into bear territory succeeded by sharp rebounds, has had reverberating effects on currency markets, disrupting carry trades that had been a staple for many global funds. Uchida suggested that future rate policy decisions will be carefully calibrated with due consideration to the prevailing state of financial markets.
Notably, Uchida underscored the importance of market stability in the BOJ’s decision-making process, signaling a cautious approach to interest rate adjustments. While some analysts, like Yuichi Kodama from Meiji Yasuda Research Institute, anticipate a potential rate hike to 0.5% before year-end, others maintain a more measured outlook, keeping their rate hike predictions unchanged post-market turbulence.
Market sentiment, as reflected in swaps markets, indicates a diminished probability—now standing at 20%—of a 25 basis-point rate hike by the December policy meeting, a significant drop from over 60% immediately following last week’s rate adjustment.
Uchida emphasized the luxury Japan has in taking a patient stance amidst market volatility before committing to any policy shifts. Drawing a contrast with rate hike trends in Europe and the US, he highlighted Japan’s unique economic position, suggesting that the BOJ will refrain from raising rates in turbulent market conditions.
A seasoned policymaker deeply involved in shaping the BOJ’s monetary easing strategies over the past decade, Uchida is recognized for his pivotal role in steering Governor Kazuo Ueda’s normalization efforts. Clarifying any potential divergence in views, Uchida stressed the evolving nature of the current market scenario, urging a cautious policy response to extreme market fluctuations.
As Uchida emphasized the need to assess the impact of market movements on prices and the broader economy, he hinted at a potential shift in Japan’s interest rate trajectory contingent upon these evaluations. Notably, the plan for continued rate hikes hinges on the realization of economic activity and price outlooks, with recent market upheavals likely to influence this decision-making process.
In a report, Toru Suehiro, chief economist at Daiwa Securities, captured the sentiment expressed in Uchida’s dovish remarks as indicative of a fresh policy direction. Despite public support for last week’s rate decision, Suehiro suggested that the ongoing hiking cycle may not have concluded, underscoring the nuanced challenges facing Japan’s monetary policy landscape.
