BOJ Governor Ueda Reaffirms Commitment to Policy Normalization Amid Market Volatility

Bank of Japan Governor Kazuo Ueda reaffirmed the central bank’s commitment to policy normalization, stating that the process would continue as long as Japan's economy moves toward stable 2% inflation. Ueda’s comments came during a hearing following recent market turmoil triggered by the BOJ’s July rate hike.

BOJ Governor Ueda Stands Firm on Policy Normalization, Emphasizes Commitment to 2% Inflation Target

As Gov. Kazuo Ueda reiterated on August 23, the Bank of Japan will continue to pursue policy normalization as long as the economy advances toward stable 2% inflation. According to Nikkei Asia, this statement was issued in response to legislators' inquiries during a hearing conducted by the financial affairs committee.

"There is no change to our basic stance that we will adjust monetary policy as we gain confidence in the likelihood" of the economy achieving stable 2% inflation, said Ueda. The hearing was called after a rate hike by the BOJ on July 31, which sparked significant market turmoil in the ensuing week, prompting lawmakers to demand explanations about how the BOJ intends to proceed with the policy it embarked on in March.

In addition, Ueda reiterated the bank's stance that its monetary policy remains highly accommodative following the July 31 hike and that a significantly higher policy rate is warranted if inflation remains consistently above 2%.

"Real interest rates are substantially negative," Ueda said, comparing the 0.25% policy rate to consumer inflation above 2%. "The current situation remains accommodative," he added, no matter how one estimates the natural interest rate -- the point that is neither expansionary nor contractionary.

According to a government report released on August 23, core consumer inflation, excluding perishable food, reached 2.7% in July. Inflation was 1.9%, except for energy and fresh food.

As Ueda testified, the yen appreciated against the dollar, rising from 146.00-146.10 at the commencement of the session to 145.30-145.40 by 11 a.m.

The statement was made in response to specific market participants' assumption that the recent turmoil would incentivize the Bank of Japan to refrain from pursuing additional normalization. "The stock market has recovered from levels that have been significantly devalued since mid-August," Ueda said. He added, however, "We will continue to monitor the situation closely with a very high sense of urgency."

BOJ Faces Scrutiny as Ueda’s Remarks and Yen Fluctuations Drive Market Volatility Ahead of Key Fed Speech

An additional hearing is scheduled for the afternoon in an upper house committee. Similar to the initial hearing, it is expected to last for two hours.

The central bank is responsible for transitioning the economy from an ultra-easy monetary policy, which is attributed to the yen's sustained weakness against the dollar while avoiding a shock to an economy that has been acclimating to economic stimulus for over two decades.

The market is closely monitoring Ueda's statements, which have caused significant fluctuations this year. In April, he made statements that minimized the yen's vulnerability, which resulted in a yen sell-off that drove it to 160 against the dollar. This compelled the Ministry of Finance to implement a record-breaking $62 billion intervention to stabilize the yen.

Ueda expressed apprehension regarding the yen's weakness, citing its potential to incite inflation, and indicated a further rate hike this year when the BOJ raised policy rates to 0.25% from between 0% and 0.1% on July 31. This caused the Nikkei Stock Average to plunge 20% in three days and triggered a massive unwinding of yen carry trades, which involved borrowing yen at low interest rates to purchase higher-yielding currencies. The yen soared to a seven-month high of 141 on August 5.

The Nikkei average recovered all of its losses on August 22, and the yen is now significantly higher than before the BOJ meeting when it was valued at approximately 153 against the dollar.

On August 7, BOJ Deputy Gov. Shinichi Uchida allayed market apprehensions regarding a rapid policy shift by announcing that the policy rate would not be raised as long as financial markets remained unstable. Additionally, the BOJ would maintain the policy rate at its current level for interim purposes.

According to numerous market participants, the direction of the financial markets is not entirely in the BOJ's control. It is also contingent upon the U.S. Federal Reserve's hawkish monetary stance, which has been the primary factor contributing to the significant disparity in interest rates between Japan and the U.S. over the past two years and the yen's depreciation against the dollar.

Fed Chair Jerome Powell is scheduled to deliver a speech on August 23. Financial markets anticipate a 100-basis point (1%) decrease in the Federal Reserve policy rate this year, with a target range of 4.25% to 4.50%. They are monitoring his speech for indications regarding the frequency and magnitude of the rate cuts.