Last week, Bank of Japan Governor Haruhiko Kuroda conveyed a clear message that the weak yen is a risk and interest rates may continue to rise.
Traders reacted strongly to Kuroda’s notably hawkish turn. The yen surged more than 3 percent against the dollar, and the Japanese stock market suffered its worst crash since 1987. In response, his deputy Masayoshi Amamiya conveyed new information this week—a rate hike is not on the central bank's agenda as long as the market remains volatile.
This has indeed had the intended effect of erasing some of the yen's gains and helping to stabilize the market, but it has also left investors confused as to how much credibility to give the Bank of Japan's statements and highlighted the difficulty the bank faces in controlling market shocks as it withdraws years of unconventional monetary stimulus.
"The Bank of Japan's inconsistent communication will only exacerbate volatility," said Charu Chanana, head of forex strategy at Prosperity Market. "If they can maintain clear communication, they can at least avoid unnecessary fluctuations in panic movements and the yen and stocks."
The minutes of the Bank of Japan's July meeting showed that some of the nine board members emphasized that monetary policy would remain accommodative. However, the possibility of a Japanese rate hike has disrupted carry trades. According to JPMorgan, two-thirds of global yield curve carry trades have been closed out.
Amamiya says his views are not at odds with his boss. The extreme market turbulence that emerged after the bank made its decision created an environment different from that during the policy meeting. Amamiya said the bank still intends to consider a rate hike once the market is sufficiently calm. This explanation did not satisfy some overseas investors.
"Communication needs to be kept clear and direct at all times," said James Malcolm, macro strategist at UBS in London. "Global investors don't have the time, inclination, or background to understand the subtle differences in Bank of Japan communication."
"Amamiya's comments are damage control by the Bank of Japan," said Carol Kong, forex strategist at Commonwealth Bank of Australia. "Recent market volatility reminds the Bank of Japan that actions and statements related to their huge yen position will have a significant impact on global markets."
As of Friday morning, overnight index swaps data showed that the likelihood of a Bank of Japan rate hike of 25 basis points by the end of this year is 31 percent, compared with over 60 percent during last week's meetings. Hideo Kumano, an economist at Dai-ichi Life Research Institute and a former Bank of Japan official, said recent market turbulence is likely to push back the bank's next rate hike, but may not deter them from their determination to hike again.
"Once the market stabilizes, the Bank of Japan will gradually send out signals that it's ready to hike rates. I believe the Bank of Japan will be more cautious in communication, so the timing of the next rate hike may be delayed," said Kumano.
Some traders sympathized with Kuroda because Japan's inflation rate has consistently exceeded the central bank's 2 percent target, partly due to a weakened yen. Rate hikes are an explicit way of boosting the yen, but their impact on traders is not within the central bank's jurisdiction.
"Although the Bank of Japan's communication seems a bit scattered, they could not have foreseen market turbulence would reach this level," said Yukio Ishizuki, senior forex market strategist at Daiwa Securities in Tokyo. "Kuroda is determined to correct the trend of a weak yen, so I think it's inevitable."
In addition, the central bank often faces challenges in clearly conveying messages because market expectations may diverge significantly from the bank's actual intentions, leading to misunderstandings of official statements or policy signals. For example, this year, betting on a US rate cut has fluctuated significantly due to data volatility and cautious comments from Fed officials. Harumi Taguchi, chief economist at S&P Global Market Intelligence, said:
"The content the Bank of Japan themselves said has not changed much, but market overreactions to tone and the highly sought-after parts of their statements have made communication very difficult."
Editor/ping