Yen declines but currency experts are not rethinking Japan's interest rate policy

Despite cautious statements from Japanese Prime Minister Shigeru Ishiba, which led to a sharp decline YenMarket analysts are not budging on their expectations regarding the Bank of Japan's long-term policy.

The yen fell to a weak level of 147.15 against the yen US dollar After Ishiba told reporters that the current economic climate does not require an additional increase in interest rates. The currency recorded its biggest single-day decline since June 2022 during the session.

“I don’t think we are in an environment that requires us to raise interest rates further,” Ishiba said on Wednesday. After his meeting with Bank of Japan Governor Kazuo Ueda – Who leads the rate-setting committee at the bank. The Prime Minister's comments represent a radical change in tone compared to the messages he sent during his last election campaign.

“This shift is particularly notable because the prime minister has been a long-time critic of previous Liberal Democratic Party administrations, including that of the late Abe Shinzo, whose policies were linked to monetary policy easing,” said Stefan Angerek, chief economist at Moody's Analytics. .

“My money is still on interest rate hikes in October,” Angrick told CNBC. Noting that the minutes of the last Bank of Japan meeting date back to September He still maintains an optimistic view of the economy.

The futures market on Thursday indicated a less than 50% chance that the Bank of Japan would raise rates by 10 basis points before the end of the year, according to LSEG data.

On Thursday morning, Bank of Japan Board Member Asahi Noguchi said He called on the central bank to continue its accommodative monetary policy at the present time. He noted that it will take some time to change the public's perception that prices will not rise significantly in the future.

The Bank of Japan kept its benchmark interest rate steady at “about 0.25%” — the highest since 2008 — in September. On July 31, the Bank of Japan raised its benchmark interest rate from its previous range of 0% to 0.1%. This came after the Bank of Japan in March raised interest rates for the first time in 17 years.

While members of the Bank of Japan's board were divided over the future path of interest rates at the September meeting, the board noted that Japanese economic activity and prices are “generally developing in line with the bank's expectations.”

The Bank of Japan is expected to review interest rates from October 30-31, when it will also provide updated quarterly forecasts for growth and prices. Another meeting is scheduled for December.

Ken Matsumoto, a macro strategist at Credit Agricole CIB, said markets expect the Bank of Japan to raise interest rates again at its next October meeting as the economic outlook and inflation remain on track. But he said Ishiba's announcement on Monday that a general election would be held on October 27 (which will decide which party will control the lower house of parliament) had derailed that matter.

Meanwhile, Matsumoto added that he expects the Bank of Japan will likely raise interest rates at its January meeting next year, rather than before. Mazen Issa, fixed income strategist at MRB Partners, said his firm “would not rule out another rate hike by the end of this year, but if not, the Bank of Japan will raise rates by early 2025.”

“We expect any further weakness in the yen to be limited,” he said.

When the Bank of Japan previously raised interest rates in July, the move unwrapped the yen carry trade, leading to a sharp sell-off in global markets. A “carry trade” occurs when an investor borrows in a currency with low interest rates, such as the yen, and reinvests the proceeds in a currency with a higher rate of return.

Higher interest rates generally lead to a stronger yen, which could negatively impact Japanese stock markets, especially those indices dominated by issuers. A strong yen makes its exports less competitive in the global market.

Issa said the Bank of Japan and the government have been working in greater coordination since the spring, and are now trying to encourage currency unification after the significant reduction in yen prices.

“The basic story remains that the Bank of Japan is on track to raise interest rates through 2025, while the timing should depend on three factors,” Nomura's Yujiro Goto said.

Goto told CNBC that the Bank of Japan's rate hike in December is still possible — but only if the yen falls further, the U.S. avoids a hard landing and the U.S. economy remains stable even after the next presidential election in November.

Kazuo Moma, executive economist at Mizuho, ​​echoed this view.

What the Bank of Japan will do depends largely on developments in exchange rates, which are materially affected by developments in the United States. “If the yen remains stable or strong, the Bank of Japan will likely wait until at least January 2025,” he said.