Yen plunges but currency experts not rethinking Japan’s rate policy

Despite Japanese Prime Minister Shigeru Ishiba's dovish comments, stocks fell sharply JPYMarket analysts' long-term policy expectations for the Bank of Japan have not changed.

JPYJPY fell to 147.15 Dollar Ishiba later told reporters that the current economic environment does not require additional interest rate increases. The currency posted its biggest one-day drop since June 2022 during the session.

“I don't think we're in an environment that requires us to raise interest rates further,” Ishiba said on Wednesday. After meeting with Bank of Japan Governor Kazuo Ueda — who heads the bank's rate-setting committee. The Prime Minister's comments marked a dramatic change in tone compared with the messaging he had delivered during recent election campaigns.

“This shift is particularly noteworthy because the prime minister has long been critical of past LDP governments, including the late Shinzo Abe's administration, whose 'Abenomics' Learn' is related to monetary easing.

“My money is still on a rate hike in October,” Angelique told CNBC. Noting the minutes of the latest Bank of Japan meeting in September Still optimistic about the economy.

Futures markets on Thursday suggested there was less than a 50% chance that the Bank of Japan would raise interest rates by 10 basis points before the end of the year, according to data from the London Stock Exchange.

Thursday morning, Asahi Noguchi, a member of the Board of Directors of the Bank of Japan, said The central bank should continue to implement loose monetary policy for the time being. He pointed out that it will take some time to change the public's view that prices will not rise significantly in the future.

In September, the Bank of Japan kept its benchmark interest rate at “around 0.25%,” the highest level since 2008. On July 31, the Bank of Japan raised its benchmark interest rate to 0.1% from the previous 0%. Previously, the Bank of Japan raised policy interest rates in March for the first time in 17 years.

While BOJ board members were divided over the future direction of interest rates at their September meeting, the board noted that Japan's economic activity and prices were “generally consistent with the central bank's outlook.”

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

Ken Matsumoto, macro strategist at Crédit Agricole CIB, said that with the economy and inflation outlook on track, the market expects the Bank of Japan to raise policy rates again at its upcoming October meeting. But he said that plan was derailed by Ishiba's announcement on Monday that a general election will be held on October 27, which will determine which party controls the lower house of parliament.

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

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

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

Rising interest rates typically lead to a stronger yen, which could have a negative impact on Japanese stocks, especially those indexes dominated by exporters. A stronger yen makes its exports less competitive in global markets.

Issa said the Bank of Japan and the government have been stepping up coordinated operations since the spring and are currently trying to encourage the yen to consolidate after a sharp reduction in yen interest rate differentials.

“Fundamentals still indicate that the Bank of Japan is expected to raise interest rates in 2025, and the timing should depend on three factors,” Nomura Securities' Yujiro Goto said.

Goto told CNBC that the Bank of Japan is still likely to raise interest rates in December, but only if the yen weakens further, the United States avoids a hard landing, and the U.S. economy remains stable even after the upcoming presidential election in November.

Kazuo Momma, executive economist at Mizuho Bank, agrees.

What the Bank of Japan will do depends largely on exchange rate developments, which are largely influenced by the situation in the United States. ” he said.