Key points:

  • The Bank of Japan maintains a cautious stance on interest rate hikes.
  • Looser policy announcements have weakened the Japanese yen against the dollar.
  • The Nikkei index has begun to recover after a period of high volatility.

A senior Bank of Japan official said Wednesday that the central bank will not raise interest rates amid market instability, significantly reducing the likelihood of monetary tightening in the near future.

Market volatility doesn’t contribute to increasing rates

Bank of Japan Deputy Governor Shinichi Uchida issued a statement that was a sharp departure from Governor Kazuo Ueda’s more hawkish comments last week after Japan’s surprise interest rate hike. Uchida’s comments sent Japan’s Nikkei index higher and the yen significantly weaker.

Uchida noted that the high volatility in financial markets seen last week could significantly affect the future trajectory of interest rate hikes. He suggested that if market instability alters the economic outlook and the likelihood of reaching the 2% inflation target, the central bank could reconsider its monetary policy.

In a speech to businessmen in Hakodate, Uchida stressed the need to maintain the current level of monetary easing amid heightened market volatility both at home and abroad. In a subsequent press conference, he added that the BOJ should exercise caution in deciding whether to raise interest rates given the current situation.

Uchida’s comments come as Governor Ueda last week signaled the possibility of further rate hikes. Some traders believe those comments triggered the massive sell-off in the Japanese currency.

Yen falls after gains

Bank of Japan Deputy Governor Shinichi Uchida said stock market volatility will have a significant impact on the central bank’s decisions, as it could affect business activity and consumer demand.

Noting that the BOJ is not in the same situation as central banks in the US and Europe, where a lag in raising rates could have negative consequences, Uchida stressed that the priority remains the stability of financial markets.

“We won’t rush to raise interest rates in the face of market instability,” he said.

In response to Uchida’s remarks, the dollar hit a session high of 147.50 yen and then strengthened 1.8% to 146.84 yen. In parallel, the yield on 10-year Japanese government bonds fell 1 basis point to 0.875%.

The Nikkei index, after yesterday’s 10% gain, rose another 1.2% today. This suggests that investors are beginning to regain confidence after the recent market rout, which saw the index lose 13% in a single day.

The yen weakened more than 2.35% against the dollar, hitting a session low of 147.935 after Uchida’s comments.

Recall that last week, the Bank of Japan decided to raise interest rates and began phasing out its massive quantitative easing program, a significant shift in its monetary policy.