Source: Caixin News

Editor: Xiao Xiang

Different formulas, familiar tastes...

In the past week, as officials' statements and media reports sent mixed signals about the Bank of Japan's intention to raise interest rates, traders have become increasingly confused about when the Bank of Japan will raise rates. This scene evidently reminds one of the events leading up to this year's 'Black Monday' in August, when there was also no certainty regarding whether the Bank of Japan would raise interest rates at the end of July, and ultimately, the decision to raise rates led to a storm of unwinding yen arbitrage trades.

Upon taking office, Bank of Japan Governor Kazuo Ueda was highly praised for his clear and orderly communication style, which was seen as a significant difference from his predecessor Haruhiko Kuroda, who often shocked global markets with unexpected decisions.

Even so, the current decision-making body of the Bank of Japan has faced criticism, especially since the rate hike in July triggered a historic plunge in the Japanese stock market and turmoil in global markets, while the recent communication style of the Bank of Japan has made traders feel a sense of déjà vu reminiscent of this summer...

Keiko Onogi, a senior Japanese government bond strategist at Daiwa Securities, stated, "I don't know what the Bank of Japan wants to do - after July, I hoped the bank would improve its communication with the market, but not much has changed. My feeling is that if the Bank of Japan says it will not raise rates, the yen will depreciate as a result, which may be the reason for this strange communication style."

From the recent statements of Japanese officials, schedules, and media reports, a series of confusing signals about interest rate hikes can be discerned:

Last month, Bank of Japan Governor Kazuo Ueda stated in a media interview that raising rates is "imminent," however, just a few days later, a report from the Japan Times emphasized that concerns within the Bank of Japan about raising rates too early are growing.

Last week, one of the most dovish officials at the Bank of Japan, Nakamura Toyoaki, seemed to ignite hopes for an interest rate hike this month. He stated that he does not oppose a rate increase, but policy must be determined based on data.

However, this week, the Bank of Japan announced that Deputy Governor Izumi Noriyasu will give a speech to local business leaders in Yokohama on January 14 next year, followed by a press conference. This move can be considered unusual, as for over a decade, members of the BOJ's policy board have never held such events before the first monetary policy meeting of the new year, which seems to hint at a rate hike being more likely in January rather than this month.

This back-and-forth of news seems to make it difficult for investors who typically pay close attention to the Japanese market to clarify whether the Bank of Japan will actually press the interest rate hike button next week.

This has already caused a serious divergence among media surveys and interest rate market pricing—last month, slightly over half of economists surveyed by Reuters expected the Bank of Japan to raise rates in December. However, the current overnight index swap pricing indicates that the likelihood of a rate hike in December is only about 22%. (Cailian Press note: A similar divergence occurred in July, where media surveys expected no hike, while interest rate market pricing anticipated a hike.)

Ryutaro Kimura, a fixed income strategist at AXA SA Sponsored ADR in Tokyo, stated, "Focusing too much on the date of the speech to make decisions seems very dangerous now. If the Bank of Japan believes it can raise rates in January, then it really has no reason not to do so in December."

The unknown is the most dangerous.

Although central banks are not obliged to inform traders about their plans, it is undeniable that the more unexpected events they create, the greater the likelihood of unusual market fluctuations, which may also disrupt long-term investments in the economic sector.

From a timing perspective, the Bank of Japan's rate decision next week will be made a few hours after the Federal Reserve's announcement, and the Fed is currently widely expected to cut rates at next week's meeting. The divergence in rate directions between the two central banks may again lead to significant volatility in Japan's stock, bond, and currency markets.

The Bank of Japan's interest rate hike could naturally push up the yen. However, if it decides to maintain the current rate, the yen will likely experience a rapid depreciation at first — of course, if the market quickly prices in the possibility of a rate hike in January, the drop in the yen may be limited.

Regardless of whether the Bank of Japan raises interest rates, Governor Ueda Kazuo may provide new guidance on the future interest rate path and triggers for action at the post-meeting press conference, which will also become a major focus for the market.

Some industry insiders expect that if the Bank of Japan maintains interest rates this month, Ueda may release hawkish hints to avoid triggering an undesirable sharp drop in the yen, explaining the key factors he will carefully consider when determining the timing of a rate hike. Conversely, if the Bank of Japan decides to raise rates this month, Ueda may send more dovish signals, reassuring the market that the Bank of Japan will not automatically continue to raise rates, but will take a more cautious approach to the next tightening measures.

In addition to the interest rate decision, the Bank of Japan will also announce the results of its analysis on the pros and cons of various unconventional monetary easing tools used in its 25-year struggle against deflation next week, marking another symbolic step toward ending its large-scale stimulus policy. The conclusion of the review is likely to be that, compared to unconventional measures (such as former Governor Kuroda Haruhiko's large-scale asset purchase program), lowering interest rates remains a better tool for dealing with economic stagnation.

Ataru Okumura, a senior interest rate strategist at SMBC Nikko Securities, wrote in a report that complex communication may continue until the eve of the Bank of Japan's December meeting. If the Bank of Japan still does not make a clear decision by then, the discussion of a rate hike in December may again take center stage.

Editor/Rocky