The aggressive whispers from the Analysis-Bank of Japan were drowned out by the yen’s noisy sell-off. By Reuters

By Leika Kihara

TOKYO (Reuters) – The Bank of Japan’s decision to leave policy unchanged last week gave the yen plenty of sell signals, but largely overlooked amid the rush were signals that the central bank will cut interest rates in phases in coming years could increase, with a possible interest rate increase in the coming years. autumn.

The yen hit a new 34-year low as markets focused on Friday’s BOJ decision to keep interest rates near zero and a lack of signals from Governor Kazuo Ueda that the currency’s fall could affect the timing of the could accelerate the next rate hike.

BOJ observers say that while the central bank’s quarterly report and Ueda’s comments clearly suggest that successive rate hikes are on the table, the central bank’s inability to effectively communicate its policy intentions has exacerbated the yen’s sell-off.

In its quarterly report published Friday, which serves as a basis for long-term monetary policy, the BOJ forecast that inflation would remain around the 2% target over the next three years, and said price growth was likely to be at a level generally consistent” with the target of around end 2025.

The report also included language for the first time that the central bank would “adjust the degree of monetary easing” – code for rate hikes, according to BOJ watchers – if the economy and prices meet expectations.

“All things considered, the BOJ is essentially stating that it has a plan for a successive rate hike in mind,” said former BOJ official Nobuyasu Atago, who expects the next rate hike to come in September.

“It is clear that the central bank is steadily laying the groundwork for a rate hike that could bring short-term rates to around 1% by the end of 2026,” said Atago, currently chief economist at the Rakuten Securities Economic Research Institute.

Although ignored by traders looking for stronger warnings about yen weakness, Ueda said the BOJ could preemptively raise rates if the boost to inflation from the currency’s declines continues and affects companies’ wage-setting behavior.

“The recent decline in the yen will only start to have a material impact on inflation around autumn this year,” said a source familiar with the BOJ’s thinking.

“In short, the BOJ is indicating that there is a pretty good chance that the next rate hike will happen around that time,” the source said.

COMMUNICATION FUMBLE

After ending eight years of negative interest rates in March and other vestiges of its massive stimulus program, the BOJ now sets short-term interest rates at a range of 0-0.1%.

Many market players expect the BOJ to raise rates to 0.2% or 0.25% later this year, although they are divided on how quickly rates will move after that.

In a sign that the BOJ may not wait too long after the next rate hike, Ueda said he expects short-term rates to rise near Japan’s neutral rate — which many economists estimate to be somewhere between 0.5% and 1% — around the end of 2025. .5%. 2026.

“If you take the report and Ueda’s comments at face value, the BOJ’s short-term target rate could reach 1% in the second half of fiscal 2025,” said Naoya Hasegawa, chief bond strategist at Okasan Securities Research.

The BOJ currently does not release estimates for Japan’s neutral interest rate, the rate at which monetary policy is neither contractionary nor expansionary.

But Ueda said last month that the BOJ will “gain insights on neutral rates” during the rate hike process.

He also said Friday that the BOJ would continue to work on lowering the estimated neutral rate, suggesting the level would be crucial not only for assessing the pace of future rate hikes but also for the bank’s communications on the prospects for monetary policy.

Former BOJ board member Takahide Kiuchi said the BOJ could in the future publish the board’s average estimate of neutral rates as a guide to markets heading for a rate hike.

“Any such guidance could raise long-term interest rates and slow the yen’s decline. But it is not a tool that can be easily used, as rising rates can also depress stock prices,” he said.

The market’s dovish interpretation of Ueda’s comments accelerated the yen’s decline, leading to suspected intervention by Japanese authorities in buying the yen on Monday.

There are no more explicit guarantees that aggressive BOJ signals would alleviate the massive downward pressure on the yen, given the other factors impacting the currency.

However, the BoJ’s inability to deliver its aggressive message underlines the communications challenge it faces in countering the yen’s decline, especially as the Federal Reserve keeps US interest rates high for longer than expected.

“The governor may have been too honest and sincere when he explained how the weak yen could only accelerate inflation in the long run,” said Kiuchi, who is now an executive economist at the Nomura Research Institute.

“He could have issued a stronger warning against the negative impact of the weak yen,” he said. “It was a communication error on the part of the BOJ.”