Day: July 24, 2024

Reports in the market that some members of the BoJ are calling for an interest increase to fight the plummeting yen.

Minutes from a private sector meeting, published today, showed that members of the key government council made calls for the BoJ to raise rates to prevent the yen from falling excessively.

The BoJ governor, Kazuo Ueda, was present at the meeting. Various members raised their concerns that a weak yen would increase price pressures and hurt consumption. The comments were made on July 19, where members discussed long-term economic forecasts.

It sems likely that the central bank will debate a rate hike at its scheduled monetary policy meeting on July 30-31. The outcome will depend greatly on how long board members believe they should wait to clarify if inflation has stabilized and if consumption will recover.

Hawks argue that inflation is at 2.8%, and has been above 2%, the BoJ target, for over 2 years. Workers saw base wage increases rise the most in 3 decades, and these two factors are bound to spur higher inflation.

While doves view recent weak consumption and household sentiment as reasons to hold off on any further interest rate hikes. However, the call to defend the falling yen has come from various government officials and may prove too compelling.

The [[NIKKEI225]] dropped 1.5% at one point, after which it recovered some ground during the European session. The sentiment is that the central bank is likely to raise rates at some point, just a matter of when.

[[NIKKEI225-graph]]

BoJ Bond Buying Program

To defend the selloff in the yen the BoJ also has another weapon in its arsenal. The bond purchasing program, In the centrals bank’s policy to add liquidity and not cut rates further, the BoJ has been buying JGBs from the market.

This process has allowed the central bank to prop up prices and keep bond yields low. Low real yields and a wide interest rate gap between the U.S. dollar and the yen have encouraged carry trades short yen and long dollar.

At the upcoming monetary policy meeting the BoJ will reveal details of the ongoing bond purchasing program. Word on the street is that the central bank is likely to taper the purchase gradually over various phases.

The board members previously met with market participants to determine levels that would be considered acceptable. Inevitably the reduction in purchase will cause a spike in bond yields. At the overnight 40-year bond auction the average yield rose to 2.42$ from 2.27% at the previous auction.

Simply a taste of thing to come, I would say the NIKKEI225 will come under major pressure as the yen strengthens and yields rise. Foreign investment in Japanese stocks has been on the rise thanks to a cheap yen, and that source may look for other opportunities if the yen strengthens.