BoJ’s Ueda flags more rate hikes if economy and inflation on track

TOKYO: Bank of Japan governor Kazuo Ueda indicated Friday that officials could hike interest rates again if inflation and the economy performed as expected, weeks after turmoil caused by a surprise increase earlier this month.

TOKYO: Bank of Japan governor Kazuo Ueda (right) speaks at the House of Representatives Finance and Financial Services Committee, as Japan's Finance Minister Shunichi Suzuki (left) looks on Aug 23, 2024.-- AFP.

The remarks come after markets were sent into a spin by the bank’s second hike in 17 years on July 31, hours before the Federal Reserve indicated it was set to start cutting.

The decision, and hints at more to come, sparked a sharp unwind of the “yen carry trade” — in which investors use the cheaper currency to buy higher-yielding assets such as stocks — and sent equities plunging and the yen soaring.

“We will continue to adjust the degree of monetary easing if we can confirm a rising certainty that the economy and prices will stay in line with our forecasts,” Ueda told parliament just as data showed core inflation edged higher in July and remained well above the bank’s target.

He also warned that “financial and capital markets at home and abroad remain volatile”, adding “it is necessary to monitor (the markets) with a high sense of urgency”.

Ueda explained in the parliament the market turmoil was triggered as “fears of a slowdown in the US economy spread rapidly”. “This caused a global depreciation of the dollar and a fall in stock prices.” Ueda added that the July rate hike decision was “appropriate”, citing the increase in wages. The BoJ’s deputy governor earlier this month said officials would not raise interest rates when financial markets were unstable. Figures earlier Friday showed Japan’s core consumer price index hit 2.7 percent last month, in line with expectations but up slightly from June. Increases in the cost of electricity and gas, processed food and car insurance premiums were among the areas contributing to the uptick, the internal affairs ministry said in a statement. While price increases at the petrol pump slowed, that was offset by rising electricity and natural gas fees, the ministry added.

Meanwhile, the yen rose on Friday as traders considered comments from Bank of Japan Governor Kazuo Ueda, who sought to calm lingering nerves after a surprise rate hike last month, while markets braced for a speech from Federal Reserve Chair Jerome Powell.

With the spotlight squarely on the central bankers, Ueda appeared first in Japan’s parliament to explain the rate increase that had rattled investors. The yen was 0.38 percent higher at 145.75 per dollar on Friday in choppy trading after Ueda reaffirmed his resolve to raise rates if inflation stayed on course to sustainably hit the 2 percent target, but warned financial markets remained unstable.

“His (Ueda) comments suggest that market turbulence won’t deter the BoJ from considering more rate hikes in the future even if the next move isn’t imminent,” said Vasu Menon, managing director of investment strategy at OCBC.

Bouts of Japanese interventions and the interest rate hike in July tripped up investors who unwound the popular carry trade, in which traders borrowed yen to finance high-yielding assets, yanking the yen away from the 38-year lows touched last month. The move from the BoJ coupled with worries of US recession triggered a massive global selloff in early August, although most markets have recovered since then. The dollar index, which measures the greenback versus six major peers, was 0.11 percent lower at 101.35 after rising 0.34 percent in the previous session, but it remained close to the 2024 low of 100.92 it touched on Wednesday. The index is headed for fifth straight week of losses. — Agencies.