Aug 5 2024: Minutes from the Bank of Japan’s (BOJ) June meeting, released on Monday, show that at least two of the nine board members advocated for an early interest rate increase, highlighting a more hawkish stance that suggests potential for further hikes.
The minutes indicate that members discussed the yen’s recent depreciation as a factor pushing up inflation, which necessitates close attention in monetary policy decisions.
The discussions at the June meeting reflect concerns about yen fluctuations and potential inflation overshoots, which contributed to the BOJ’s decision in July to raise interest rates to levels not seen in 15 years.
With the yen hitting a seven-month high on Monday, market attention is now on BOJ Deputy Governor Shinichi Uchida’s upcoming speech for insights on future rate hikes.
“Given that the recent yen appreciation is reducing the risk of an inflation overshoot, we anticipate the BOJ will implement rate hikes on a semi-annual basis rather than more frequently,” said Yoshimasa Maruyama, chief market economist at SMBC Nikko Securities.
The yen’s recent rise has been fueled by weak U.S. labor data, which has heightened recession concerns. On Monday, the yen strengthened as much as 3.4% to 141.675 per dollar before easing to 143.165.
Uncertainty Clouds Rate Outlook
Although the BOJ kept interest rates unchanged at its June meeting, some board members expressed concerns that rising import costs due to a weak yen were impacting consumer sentiment and increasing the risk of inflation overshooting. One member suggested the BOJ might need to “adjust the degree of monetary easing” to manage future inflation risks, as firms seek to pass on higher costs to consumers.
Another member proposed that the BOJ should continue monitoring relevant data closely and, if necessary, raise rates promptly before the next meeting in July.
At the time of the June meeting, the yen was around 157 to the dollar and fell to a 38-year low below 161 in July. This likely influenced the BOJ’s decision to raise short-term rates from 0-0.1% to 0.25% at the July 30-31 meeting.
After the July rate hike, BOJ Governor Kazuo Ueda did not rule out the possibility of further increases this year and emphasized the central bank’s readiness to continue raising rates to neutral levels, estimated by analysts to be between 1% and 1.5%.
However, the recent market turmoil, which followed the BOJ’s rate hike decision, raises questions about the central bank’s ability to proceed with further rate increases.
Finance Minister Shunichi Suzuki stated on Monday that authorities are closely monitoring market movements after the Nikkei stock index experienced its biggest drop since 1987.
Opposition leader Kenta Izumi called for BOJ Governor Kazuo Ueda to explain the rate decision in parliament, although it is uncertain whether the government will respond to this request.
Japanese manufacturers, who benefited from the weak yen, have based their business plans on an average assumed dollar/yen rate of 144.77 for the current fiscal year, according to the BOJ’s June “tankan” survey. A sustained yen rise above this level could impact manufacturers’ earnings and the export-dependent economy.
“From an economic perspective, both the U.S. and Japanese economies are not in dire straits, and the market adjustments appear to be a swift correction of stock and currency markets that were inflated by overseas investors,” said Saisuke Suzuki, senior economist at Mizuho Research & Technologies.
“However, this could create a ‘negative wealth effect’ on Japanese household spending, potentially delaying a consumption-driven recovery and undermining retail investors’ confidence,” he added.