Bank of Japan Governor Kazuo Ueda warns global markets are ‘unstable’

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The Bank of Japan’s governor warned on Friday that global markets remained volatile, reaffirming his commitment to raise interest rates if the country’s inflation and economic growth remain on track.

Kazuo Ueda’s comments came after nearly six weeks of extreme market volatility in which the yen fell to an all-time low of 161 yen to the dollar before sharply reversing course and rising more than 10 percent. Japan’s stock market climbed to an all-time high before suffering its biggest one-day drop.

The central bank ended its policy of negative interest rates in March after decades of continuous deflation. Ueda told parliament that recent volatility was fueled primarily by concerns about the US economy rather than the BoJ’s interest rate hike at the end of July, but noted that “markets at home and abroad remain volatile, so that we will monitor market developments with a very keen sense. emergency”.

Despite this recent instability, Ueda told a specially convened parliamentary hearing on Friday that there had been “no change” in the central bank’s basic position that it would adjust monetary policy if it was “convinced that economic developments and prices move according to the forecast”.

Ueda’s comments, which pushed the yen about 0.5 percent higher against the dollar in morning trade, came as he was questioned about the July rate decision, which critics said was accompanied by of confusing messages from the central bank.

The 0.15 percentage point increase took Japan’s short-term policy rate to 0.25 percent, still extremely low by global central bank standards but a significant step toward the “normalization” expected by Ueda after years of ultra-lax policy.

“Japan’s short-term rates are still very low. If the economy is in a healthy state, it will rise to levels that we consider neutral,” said Ueda, who also acknowledged that there is still significant uncertainty about the final level of Japanese interest rates.

Ueda defended the July rate hike, saying its purpose was to “reaffirm that the economy is generally moving in line with our economic and price outlook, particularly the inflation outlook, which in terms of core inflation , is expected to remain at a level consistent with the sustainable price stability target of 2% in the second half of the forecast period”.

However, in the same session on Friday, Finance Minister Shunichi Suzuki said the government has yet to officially declare an end to deflation. “We think we have reached a point where conditions are no longer deflationary, but we cannot deny the possibility that the country will return to deflation,” Suzuki said.

Although economists had forecast modest rate hikes from the BoJ in 2024, the July move caught many market participants by surprise. In the days that followed, the yen rose sharply against the dollar, triggering a huge run of speculative yen short positions known as “carry trades.”

Volatility has increased amid concerns that the US economy is at risk of recession. On Friday morning, Ueda and others faced two and a half hours of questioning from a panel of members of the lower house. A similar session will be held in the upper chamber on Friday afternoon.