September 9, 2023, at 5:00 a.m. Tokyotime, the Yomiuri Shimbun published an exclusive interview with the Governor of the Bank of Japan, Haruhiko Kuroda. The interview took place on September 6 at the headquarters of the Bank of Japan. The main points of the report are as follows.
Why 5.00 AM?
The relevant report was released at 5:00 am on Saturday, it was to cushion the impact of the hawkish information on the market.
About Inflation
"The positive signs of achieving the inflation target are continuing, but we have not yet reached the stage of achieving the inflation target. If the positive cycle of monetary easing, rising wages and rising prices stops and continues to operate autonomously, it can be considered as achieving the inflation target."
The statement "The positive signs of achieving the inflation target are continuing" confirms that Japan's current trend of rising prices is slowly curing the chronic deflation of the past. However, we believe that there is still a certain distance to go before achieving the inflation target, and Itada places great importance on the positive cycle of "rising wages and rising prices", and future wage data will be very important.
About Negative Interest Rate
When it is certain that the rise in prices is due to the increase in wages, the Bank of Japan will adopt various options, including exiting negative interest rates. When the economic and price situation exceeds expectations, it is currently undecided how much the interest rate should be raised and how many policies should be adjusted. Raising interest rates will have a negative impact on total demand (consumption), but if it can be determined that achieving the inflation target is possible after exiting negative interest rates, then exiting negative interest rates will be considered.’
It conveys three prerequisites for exiting negative interest rates:
When it can be confirmed that the price increase is caused by wage growth
When the economic and price situation unexpectedly goes up
When it can be determined that achieving the inflation target is still possible after exiting negative interest rates
The key to exiting negative interest rates depends on the outcome of the "Spring Struggle" in 2024. However, signs of the outcome of the "Spring Struggle" in 2024 can be seen by the end of 2023. If the signs are strong enough, there is a possibility of exiting negative interest rates by the end of 2023.
About YCC
"The measure to raise the effective upper limit of the 10-year interest rate to 1.0% in July of this year can be seen as a form of crisis management (being prepared for unforeseen circumstances). When the economic and price situation unexpectedly rises, the Bank of Japan faces significant challenges, and the possibility of abandoning YCC (Yield Curve Control) is not entirely ruled out in the end.
it implies that the Bank of Japan may also consider the possibility of early abandonment of YCC. We believe the normal sequence should be 'abandon YCC first, then exit negative interest rates,' so there is a possibility that the Bank of Japan may abandon YCC before exiting negative interest rates (during the period from September to December).
"The reference range for YCC's variation remains ±0.5%. However, the market believes that this range is no longer valid.
Uetani did not deny this viewpoint. Not denying such views expresses Uetani's tacit approval of them. It can also be understood as laying the groundwork for abandoning YCC in the future, allowing for a soft landing for the abandonment of YCC.
Under the support of economic fundamentals, Shida believes that Japanese bond yield can rise further. This statement may also be a prelude to abandoning YCC.
About Monetory Policy
How much room for monetary easing remains is actually difficult for the Bank of Japan to determine when there is a risk of price decline. Therefore, we must pay attention to the downside risk of prices. However, this does not mean that we completely ignore the upside risk of prices; we are not actively tolerating a monetary policy that is 'behind the curve.
This passage indicates that the Bank of Japan has already eased its policy to the "extreme," and there are no more tools available for future inflation declines.In general, the Bank of Japan is more concerned about deflation than inflation. BOJ will not allow excessive inflation to occur, so it will moderately tighten monetary policy at the appropriate time.
About Yen
"Hopes that the exchange rate is based on fundamental fluctuations. Regarding the yen exchange rate, in conjunction with the Japanese government, continuous communication will be maintained, and an assessment will be made of the impact of the exchange rate on the economy and prices."
Ueda has more comments on the exchange rate, his recent interview remarks are overall more hawkish, and one of the purposes is to restrain the recent rapid depreciation of the yen.
Conclusion
The possibility of the Bank of Japan "unexpectedly" raising interest rates is relatively low.
In the coming months, the Bank of Japan may continue to engage in a series of communications with the market, and the impact of interest rate hikes is expected to be gradually released over the next few months.
If the fundamentals of the Japanese economy and inflation continue to improve in the coming months, the Bank of Japan may continue to communicate with the market about exiting negative interest rates.
Comments
Money is one's own, and investments should be made cautiously, especially in Japan, as this year's black swan event could possibly be an interest rate hike.
In fact, the Nikkei Index has not only been bullish this year but has also been in a bull market for the past five years.
Japanese forex analysis: Don't worry, someone is in charge; consider buying at the lowest point.
This clearly serves as a warning to people not to hastily sell the Japanese yen.
Wall Street is currently in a state of high alert.