Dovish comments from Japan’s new prime minister reignite yen trade

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An apparent policy shift by Shigeru Ishiba, made just 36 hours after being officially sworn in as Japan’s new prime minister, reignited market bets on the yen’s carry trade and sent the currency to a six-week low.

In Tokyo trading on Thursday, the yen fell below 147 yen against the dollar after a sharp drop overnight in US market hours. Hedge funds are betting there will be no interest rate hikes for at least four months under Ishiba and have begun to rebuild short yen positions.

Thursday’s move followed confusing comments on Wednesday from Ishiba – a veteran politician who has historically shied away from economic and market business – in which he said the Japanese economy was “not in an environment” for further rate hikes to the Bank of Japan.

His comments came after a meeting on Wednesday with BoJ Governor Kazuo Ueda. Ueda told reporters that the central bank will adjust policy if the economy and prices move in line with forecasts, but that there is “a lot of time” to determine if that is indeed the case.

Ishiba’s blunt remarks, which were seen by some analysts as evidence that he had yet to appreciate his potential influence on markets, appeared sharply at odds with his earlier tone of more solicitous support for the central bank and its attempts to “normalize” Japanese. monetary policy after years in an ultra-loose stance.

The sharp decline in the yen, which has swung for gains and losses of about 12 percent against the dollar this year, sparked a sharp rally in Tokyo stocks on Thursday. The Nikkei 225 Average gained just under 2 percent, led by stocks that traditionally benefit from a weaker currency.

“For right or wrong, currency markets took Ishiba’s comments as a signal that he might start to lean on the BoJ to be more accommodative, so we started to see yen trading come back,” he said a Tokyo forex. trader, who cautioned that the market is likely overestimating the strength of Ishiba’s intended message.

A previous massive build-up in yen trading, in which speculators borrow yen to fund bets on other, higher-yielding currencies, unraveled in early August, triggering a plunge in Japanese stock markets.

Analysts cautioned against reading too much into Ishiba’s words, particularly given his lack of experience in public commentary on monetary policy and the fact that the new prime minister has called an early general election for later this month.

“Ishiba’s comments have always been more dovish because of the election: he doesn’t want to go into this with the stock market weak, so it’s reasonable to try to calm him down,” said Yujiro Goto, chief FX strategist at Nomura. Goto noted that Japanese stocks fell nearly 5 percent on Monday in the first trading session after Ishiba was appointed prime minister.

“At the same time, Ishiba does not want the currency to become too weak before the election, as this increases import costs and price increases are felt negatively by households,” Goto said. He still forecasts the BoJ will raise interest rates again in December and has not changed his 145 dollar-yen forecast for the end of this year, despite the new prime minister’s comments.

“There’s a fine line between supporting the market and inviting inflation, which is why we probably won’t see any action to back up what Ishiba is saying. Talk is talk, and I don’t think he intends to undermine the Bank of Japan’s independence,” said Naomi Fink, chief global strategist at Nikko Asset Management.

Asahi Noguchi, a BoJ board member, told a news conference on Thursday that the central bank had room to raise rates but had to move cautiously to avoid damaging the economy.