Ueda’s Caution Risks Yen Punching Holes in BOJ Policy Logic

(Bloomberg) -- Bank of Japan Governor Kazuo Ueda’s newfound caution and the renewed yen weakness it has sparked risks damaging the logic of his campaign to keep normalizing policy in line with developments in the economy.

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Ueda’s messaging may lose credibility if he ends up raising interest rates largely to protect the yen from further falls instead of moving when economic data supports a hike, according to economists.

Last week’s BOJ meeting was seen by many analysts as an ideal moment to hike rates with inflation, wages and the economy largely tracking the central bank’s forecasts and with the yen showing more resilience against the dollar than last month. Some 86% of economists polled by Bloomberg before the decision said the time was ripe for a move.

Instead, the central bank opted to bide its time. A complicated domestic political situation and uncertainties stemming from Donald Trump’s return to the White House in January were likely among factors that played into the decision. But Ueda’s unexpected signaling that the bank might further delay its next move until March or later prompted a renewed slide in the yen to a five-month low and fresh questions about the BOJ’s communication strategy.

“I wasn’t expecting his remarks to give some kind of commitment to a January hike,” Ryutaro Kono, chief Japan economist at BNP Paribas, wrote in a note. “But I thought he would suggest he is leaning toward a rate hike in the near future, with the intention of warning against a further weakening in the yen.”

With this comments, Ueda was likely trying to avoid getting boxed into a January rate hike. But by giving a weaker signal than traders expected for the possibility of a move next month, he fueled yen weakness that may force him to hike in January for reasons that don’t fully align with his goals.

If he does prefer to wait until spring before moving, the central bank chief will likely be hoping that finance ministry officials can scare the yen bears away for long enough with threats of intervention.

“I’m not sure if yen weakness can be contained until March,” said Daisuke Karakama, chief market economist at Mizuho Bank, “There’s no guarantee the yen won’t break 160 by the January meeting. If they had to move then, that would create the impression that monetary policy is steadily turning into currency policy.”