BlackRock portfolio manager Rie Shigekawa indicated that the Japanese yen faces a risk of depreciation if the Bank of Japan fails to guide market expectations ahead of a potential June interest rate hike at its upcoming policy meeting.
Shigekawa noted that since the outbreak of conflict in the Middle East, market expectations for a rate hike next week have cooled. As a result, it is crucial for Governor Kazuo Ueda to send a clear signal emphasizing that the policy committee remains committed to raising rates as early as June.
She stated, "If policy signals are mishandled, the yen will inevitably come under pressure." However, she added that markets are currently largely confident that the Bank of Japan will proceed with the next rate hike in June.
According to sources this week, the Bank of Japan is leaning toward keeping policy rates unchanged next week, though officials maintain that a benchmark rate increase will occur eventually. A Bloomberg News survey shows that most economists currently expect the next rate hike to take place in June.
Former Bank of Japan policy board member Sayuri Shirai also highlighted the same risk of yen depreciation. Speaking at the same forum, she suggested that next week would be an opportune time for the central bank to raise rates in order to counter the current excessively weak yen, which is squeezing household purchasing power.
Shirai, an economics professor at Keio University in Tokyo, said, "If the Bank of Japan chooses to delay a rate hike, market sentiment will become unsettled." Should markets perceive the central bank as being behind the curve or reluctant to raise rates, it could directly trigger further yen weakening.
The current exchange rate for the yen against the U.S. dollar is around 159.7. With inflationary pressures building due to higher energy prices resulting from the Iran conflict, further yen weakness would exacerbate inflation concerns.
Both experts noted that despite heightened uncertainty in the economic outlook due to the Middle East conflict, the Bank of Japan’s recent shift in policy tone has taken markets by surprise in recent weeks.
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