Japanese Yen: BoJ Could Soon Lay Foundations for Another Hike, says Mizuho
- Written by: Gary Howes
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The Bank of Japan might soon send some 'hawkish' signals.
Faced with an under pressure Japanes yen, the Bank of Japan could be inclined to raise interest rates again in the coming months.
New research from Japanese bank Mizuho says the Bank will need to start dropping hints soon:
"The BOJ has already laid out the logic that could be used to justify a further rate hike in the event of the yen continuing to weaken, and the scheduled speaking appearances for comparatively hawkish policy board members could ultimately serve as opportunities to encourage market participants to give greater thought to the possibility of a hike as soon as April or possibly even March if deemed necessary," says Yusuke Matsuo, Senior Market Economist at Mizuho.
The analyst says board members will use their appearances to prevent a "surprise" rate move that could prove highly disruptive.
"We accordingly suggest paying close attention to not only the substance of what board members end up having to say but also to (1) exchange rate levels around the time of each speech and (2) any changes in tone vis-à-vis rate hike prospects," says
The yen has been under significant pressure as markets see the government of Sanae Takaichi as being intent on running the economy 'hot' by lowering taxes, boosting spending and encouraging the central bank to hold interest rates as low as possible for as long as possible.
Above: GBP/JPY breaks new 18-year highs midweek as JPY comes under renewed pressure.
A significant weakening of the yen as well as sharp rises in domestic interest rates were precipitated by the new Prime Minister's ascent to the leadership. The trade has retained favour as Takaichi looks to leverage her popularity by calling elections, due next week, where polling shows she should cement her power with a comfortable win.
The Bank of Japan could provide a counterweight to yen weakness if it indicates it is willing to raise interest rates.
Another upcoming JPY risk event is the replacement of Asahi Noguchi, whose term on the Bank of Japan's policy board will expire at the end of March.
Who Takaichi chooses as a replacement will send a powerful message as to how she thinks Bank of Japan policy should play out.
The choice will be between 'reflationists' and 'hawks'; a reflationist would promote a policy of lower-for-longer interest rates in order to stimulate the economy and inflation.
However, Mizuho warns that should Takaichi end up opting for a "reflationist" just as she previously did when choosing advisors to the Council for Japan's Growth Strategy and Council on Economic and Fiscal Policy, "then we would expect the yen to weaken yet further."
This is because markets would sense a true "reflationary" intent on the part of the Takaichi administration.
Downward pressure on the yen has recently eased on signs that Japanese authorities are preparing to intervene directly in the market to shore up the currency.
However, without a clear fundamental shift on fiscal and monetary policy, such interventions will only delay the currency's depreciation.