Bank of Japan Governor Kazuo Ueda revealed in his latest speech that Japan's monetary policy will remain relaxed for some time, but the Bank of Japan will reduce the scale of debt purchases at some point in the future. What the market is more concerned about is whether the Bank of Japan will raise interest rates early. Kazuo Ueda recently said that as concerns about the rapid depreciation of the yen increase in Japan, the Bank of Japan may raise interest rates.

Obviously, the Bank of Japan is currently facing greater pressure from the yen. Since this week, the yen exchange rate has continued to plummet and has now fallen below the mark of 154 yen per dollar. This is the lowest level of yen against the US dollar since June 1990. Japanese economists believe that against the backdrop of the recent rapid depreciation of the yen, the Bank of Japan should raise interest rates early.

An important reason for the rapid depreciation of the yen is the continued strengthening of the US dollar. Affected by the US inflation data exceeding expectations, the timing of the Federal Reserve's interest rate cut was further delayed. According to the latest semi-annual financial stability report released by the Federal Reserve, continued inflation is viewed as the number one risk to financial stability.

Bank of Japan emergency

On April 20, Bank of Japan Governor Kazuo Ueda said that Japan's monetary policy will remain relaxed for a period of time, and policy makers will continue to buy government bonds.

On April 19, EST, Kazuo Ueda publicly stated at the Peterson Institute for International Economics in Washington that the Bank of Japan will reduce the scale of debt purchases at some point in the future.

However, Kazuo Ueda added that the Bank of Japan believes that it is “dangerous” to completely cancel its intervention in the bond market in March. At that time, the Bank of Japan raised interest rates for the first time in 17 years and ended the yield curve control plan.

Kazuo Ueda said that the Bank of Japan will act cautiously, while pointing out that if the basic price trend improves, it may raise interest rates further.

Kazuo Ueda explained the Bank of Japan's policy shift in March, saying that the strongest wage increase in decades helped raise the possibility that the Bank of Japan will reach its price target, which is enough to prove that the policy shift is reasonable.

Earlier this month, in an interview, Kazuo Ueda emphasized the possibility that the inflation trend will improve, suggesting that interest rates may be raised in the second half of this year. Economists believe that the recent accelerated depreciation of the yen may advance this schedule.

The core inflation rate has remained at or above the 2% target set by the Bank of Japan for two consecutive years, but the Bank of Japan said it still believes there is a long way to go to achieve this target in a sustainable manner.

However, Kazuo Ueda did not reveal more about the schedule for the next rate hike.

According to a Bloomberg survey, about 41% of economists surveyed expect the Bank of Japan to raise interest rates again in October this year. With the exception of one economist, 54 economists all expect that next week's Bank of Japan meeting will not change policy.

Kazuo Ueda said that the Bank of Japan's policy changes and recent developments in the foreign exchange market have always been a hot topic of discussion with other officials in Washington.

Japan's Finance Minister Shunichi Suzuki and Japan's senior foreign exchange official Masato Kanda expressed their concerns about the weakening yen in Washington this week. Market participants believe this is a way to lay the foundation for intervention in the foreign exchange market.

The pressure on the yen

Currently, the Bank of Japan is probably facing greater pressure from the yen.

Since this week, the yen exchange rate has continued to plummet and has now fallen below the mark of 154 yen per dollar. This is the lowest level of yen against the US dollar since June 1990.

Analysts believe that mainly because the market expects the interest rate spread between Japan and the US to continue to widen, although Japanese government officials have stepped up verbal warnings, they are unable to stop the market from frantically selling yen.

The market originally anticipated that once the USD/JPY exchange rate broke through the 152 mark, Japanese officials would intervene, but so far, there are no clear signs that the Japanese regulators have acted.

As a result, a large amount of international capital continues to raise short bets on the yen. According to the latest report, hedge funds have raised their bets on shorting the yen to the highest level since January 2018.

J.P. Morgan Chase and Bank of America have seen the yen fall to 160 (the lowest point in 34 years) as the next milestone.

Daisaku Ueno, a foreign exchange strategist at Mitsubishi UFJ Morgan Stanley Securities, said that without intervention, the yen could fall to 160.20, or the level of April 1990.

In response, Kazuo Ueda also issued a warning that a weak yen may affect the trend of inflation, and if so, it may lead to a policy shift; the Bank of Japan's March policy changes attracted widespread attention.

Japanese economists believe that against the backdrop of the recent rapid depreciation of the yen, the Bank of Japan should raise interest rates early.

On Thursday local time, Kazuo Ueda said in Washington that as concerns about the rapid depreciation of the yen increase in Japan, the Bank of Japan may raise interest rates to curb inflation caused by the weakening yen.

But there is bad news about Japan's inflation.

According to the latest data released by Japan's Ministry of Internal Affairs and Communications, Japan's inflation rate in March fell from the previous month as the rise in non-fresh food and lodging prices slowed, which set up some obstacles to the Bank of Japan's interest rate hike prospects.

According to the data, Japan's CPI increased 2.7% year on year in March, slightly lower than economists' median forecast of 2.8% and the previous value of 2.8%.

Strong dollar

An important reason for the rapid depreciation of the yen is the continued strengthening of the US dollar. Because the US inflation data exceeds expectations, the Fed's interest rate cut may be further delayed. Some Fed officials even warned that if the data shows that the Fed needs to raise interest rates to achieve the target, then the Federal Reserve will raise interest rates.

At this critical moment, the latest report released by the Federal Reserve also raised a danger signal.

On April 19, local time, the Federal Reserve released its semi-annual financial stability report, stating that continued inflation is viewed as the number one risk to financial stability.

The Federal Reserve believes that according to market participants and observers, interest rates are higher than expected due to continued inflation, which is seen as the biggest threat to financial stability. “Continued inflationary pressure has led to a tighter monetary policy stance than expected, which remains the most commonly mentioned risk.”

The report shows that Fed officials are beginning to be skeptical about the downward progress of inflation and note that the pace of interest rate cuts may not be as fast as expected.

Furthermore, the report also mentioned that the leverage ratio of hedge funds reached a new high since at least 2013, geopolitical issues, and the 2024 US presidential election.

Analysts believe that there are various signs that the Federal Reserve may maintain high interest rates for a longer period of time, and the strength of the US dollar may continue. This undoubtedly puts enormous depreciation pressure on the yen, and may further pressure the Bank of Japan to consider raising interest rates early.

Editor/Jeffrey