Bank of Japan Governor Kazuo Ueda suggested a possible increase in interest rates at the financial policy decision meeting to be held on the 18th to 19th.
According to the Nihon Keizai Shimbun on the 1st, during a lecture and press conference held in Nagoya on the same day, Governor Ueda stated that “the certainty that economic and price forecasts will be realized is gradually increasing,” and “we will make an appropriate decision on whether to raise interest rates” at the December meeting.
Governor Ueda drew a line about Japan's negative real growth rate in the third quarter as a temporary phenomenon due to US tariff policies, etc. He also emphasized that “there is no change in the keynote judgment that the economy is recovering moderately.”
Disagreements with the government over interest rates also seem to be increasing frequently. The Takaichi administration, which initially advocated an “Abenomics” succession and favored an accommodative monetary policy, has been concerned about the side effects of the recent sharp weakening of the yen boosting import prices and reducing domestic demand sentiment. During a meeting with Prime Minister Takaichi last month, Governor Ueda explained that by raising interest rates, prices can be successfully settled at the 2% target, which will lead to sustainable economic growth. In his speech on this day, he emphasized that real interest rates are still in the negative range and argued that a slight increase in interest rates did not put a brake on the economy. He also emphasized that “we will adjust the degree of mitigation appropriately without being too late or too fast,” and that an appropriate increase in interest rates will lead to economic growth.
In this regard, Minister of State Kihara Minoru actually expressed his impression at the press conference that day, saying, “The specific method of future financial policy must be left to the Bank of Japan.” Ayako Fujita, an analyst at JP Morgan Securities, also explained, “Governor Ueda's remarks suggest that coordination with the government for early interest rate increases has been completed.”
The market reacted immediately. The probability of interest rate hikes in December, as reflected in the next-day interest rate swap (OIS) market, surged from 60% at the end of last week to 80% immediately after Governor Ueda's remarks on the same day. While the average stock price of Nikkei 225 fell 1.89% due to concerns about austerity, the yield on 10-year treasury bonds, which is an indicator of long-term interest rates, once rose to 1.875%, reaching its highest level in about 17 and a half years since June 2008.
However, since there are more than 2 weeks left until the December meeting, interest rate increases cannot be determined. There is also an opinion among key figures known as the “economic brain” of the Takaichi Cabinet that interest rate hikes in December are hasty. If the stock market continues to fluctuate, the Bank of Japan's logic of raising interest rates to stabilize the economy and market will collapse, and there is a possibility that opposition from the regime will strengthen.
The Bank of Japan raised the short-term policy interest rate from “0.25%” to “about 0.5%” at the financial policy decision meeting in late January, and has remained unchanged for 6 consecutive times since then.
