Fed’s accommodative shift is a mixed blessing for BOJ’s rate hike plan By Reuters

By Leica Kihara

JACKSON HOLE, Wyoming (Reuters) – The U.S. Federal Reserve’s accommodative shift is likely to give the Bank of Japan a reprieve in its struggle to tame a weak yen, but could complicate its efforts to raise interest rates if the two banks’ divergent policies central. keeps markets nervous.

At an annual symposium in Jackson Hole, Wyoming, Fed Chairman Jerome Powell said on Friday that “the time has come” to cut rates as rising risks to the labor market left no room for further weakness, providing a supportive explicit indication of an imminent relaxation of the policy.

The comments came hours after BOJ Governor Kazuo Ueda told parliament that while the BOJ will be mindful of the fallout from volatile markets, it will continue to raise rates if inflation remains on track to reach its 2 %.

The yen rose against the dollar after Ueda’s remarks and extended gains on Powell’s as markets focused on the prospect of a narrowing of the US-Japan interest rate gap.

“The buying of the yen today is understandable given that Governor Ueda has shown very little sign of changing the BOJ’s views and plans following the financial market turmoil earlier this month,” said Derek Halpenny, head of global markets research. EMEA at MUFG, in a note to clients.

The Japanese currency’s recovery comes as a relief to the BOJ, which has been under political pressure to halt its declines that have hurt consumption by inflating the cost of imported food and fuel.

But the BOJ’s rate hike trajectory is fraught with uncertainty as Japan swims against a tide of global rate cuts that could leave the currency and stock prices susceptible to wild swings.

After seeing the market rout after the BOJ’s interest rate hike in July, Japan’s central bank is already feeling the need to tread slowly and carefully.

“Markets at home and abroad remain volatile, so we will be very vigilant on market developments for now,” Ueda said on Friday, adding that big market swings could affect policy decisions if they change the board’s inflation forecasts.

Domestic political considerations also complicate the BOJ’s rate hike path as Prime Minister Fumio Kishida, who appointed Ueda to the top BOJ post, is set to step down and hand over the baton to the winner of a party leadership race in government in September.

While most of the front-runners to succeed Kishida have embraced the BOJ’s plan to moderate interest rate hikes, it is uncertain whether the new prime minister will bear higher borrowing costs if volatile markets weigh on corporate profits.

“With so much uncertainty, the BOJ probably won’t be able to take bold steps,” said former BOJ board member Makoto Sakurai, ruling out the chance of another rate hike this year. “Until the domestic political situation stabilizes, the BOJ may have difficulty raising rates,” he said.

A most recent Reuters poll showed most economists expect the BOJ to raise rates again this year, but more see the chance of that happening in December rather than October.

FRAGILE ECONOMY A RISK

The BOJ’s surprise decision to raise interest rates in July and Ueda’s signal of further hikes rattled financial markets earlier this month, forcing his deputy to offer conciliatory assurances that there would be no hikes until markets stabilise.

The key message from Ueda’s remarks in parliament on Friday was that while the BOJ will not rush to raise rates, market developments will not derail its long-term plan to keep raising borrowing costs, two sources familiar with his thinking said . .

Big data analysis of the BOJ’s recent comments underscores the bank’s rate hike stance, with the outlook on inflation remaining “very positive,” said Jeffrey Young, chief executive of DeepMacro, a US fintech firm that conducts AI-based analysis of indicators economic and decision-making factors. ‘ comments.

“Could we get another one by the end of the year? Well, probably. I think that’s what the model says,” he said of the chance of another rate hike by the BOJ.

“If you have inflation and growth on the firm side, and you have BOJ rhetoric still biased to say both inflation and growth are fine, the only thing that would really prevent it from raising rates would be market falls.”

Some analysts, however, are more cautious about the strength of Japan’s economy. While consumption rebounded in the second quarter, rising living costs weighed on household sentiment. A slowdown in the US could also hurt exports.

“Domestic demand is very weak,” said Sayuri Shirai, an academic at Keio University in Tokyo. “From an economic perspective, there is little reason for the BOJ to raise rates.”