The Japanese economy isn’t prepared for another interest rate hike. With this statement, Japan’s new Prime Minister, Shigeru Ishiba, shook up the foreign exchange markets, causing the national currency to weaken the most in over two years against the dollar.
On Wednesday, the USD/JPY gained momentum after a conversation between Prime Minister Ishiba and Bank of Japan Governor Kazuo Ueda. In a press conference following the meeting, Ishiba sought to reassure the public that monetary policy would remain easy and accommodative until the economy was ready for a rate hike, making it clear that Japan is not yet prepared for one, those such decisions are ultimately in the hands of the BOJ.
Ueda echoed this cautious approach, stating that the central bank "can afford to take time scrutinizing developments" before making any moves to raise rates.
Against this backdrop, the yen extended its decline against the US dollar. The dollar-yen pair surged 2%, or 290 pips, closing at ¥146.52 on Wednesday. Early Thursday, the exchange rate climbed another 90 pips, hitting a high last seen on September 3.
The yen’s decline was accompanied by a sell-off in US Treasuries following a stronger-than-expected jobs report, which pushed the yield on 10-year bonds up by 5 basis points to 3.78%. The sell-off in US Treasuries contributes to dollar strength (and hence yen weakness). After Federal Reserve Chairman Jerome Powell stated on September 30 that the US economy remains on solid footing, traders tempered their expectations for large Fed rate cuts.
This week’s volatility in the yen “highlights a very jittery market,” reflecting deep uncertainties about the Bank of Japan’s policy and the potential influence of the new prime minister.
Earlier this week Japan’s Nikkei 225 tumbled over 4%, following a mixed set of economic data out of Japan and as traders reacted to the election of incoming Prime Minister Shigeru Ishiba, fearing that he may influence monetary policy in a way that could harm corporate profits.
In terms of industrial output, Japan’s production fell 3.3% in August, primarily due to declines in motor vehicles and electrical machinery, despite gains in transport equipment and chemicals. A 2% increase is expected for September, followed by a 6.1% rise in October.
Japan's economic outlook remains fragile as Prime Minister Shigeru Ishiba and Bank of Japan Governor Kazuo Ueda signal a cautious approach to monetary policy. The decision to delay an interest rate hike reflects concerns about the country's recovery, as recent data shows weakness in industrial production and stock market declines.
