Japan's new Prime Minister Shigeru Ishiba stated that the Japanese economy is not ready for another interest rate hike by the central bank. This caused the USD/JPY exchange rate to increase by over 2%, with the yen dropping by more than 1.9%. Consequently, the Nikkei 225 December futures rose by 2.5%.
Prime Minister Ishiba met with Bank of Japan (BoJ) Governor Kazuo Ueda. After their meeting, Ishiba expressed that the current environment is not suitable for further rate hikes and emphasized the importance of ending deflation sustainably under accommodative monetary trends. Ueda confirmed that the BoJ is supporting the economy under loose monetary conditions and will continue to do so if economic and price developments align with their forecasts. He also mentioned that the BoJ will carefully adjust the degree of monetary support as needed.
Analysts noted that Ishiba’s quick post-election meeting with Ueda reflects the government's intent to closely coordinate with the central bank. Most observers predict that the BoJ will not change interest rates at their meeting this month, with the next potential rate hike expected in December or January.
On the same day, Ishiba's ally, the new Minister of Economic and Fiscal Policy, Ryozo Akazawa, also highlighted the need for the BoJ to be cautious about further rate hikes. Despite the current policy rate of 0.25% being considered abnormal by global standards, the primary goal remains to overcome deflation.
Finance Minister Katsunobu Kato echoed this sentiment, stating that defeating deflation should be the top priority. He hopes the BoJ will implement suitable monetary policies to achieve the stable inflation target of 2% and communicate carefully with the market.
Senior FX analyst at Mitsubishi UFJ Financial Group, Lee Hardman, mentioned that political pressure will likely slow down the BoJ's pace of rate hikes, encouraging market participants to rebuild short positions in the yen. The yen's strength during the summer has helped mitigate inflation risks.
In the US, better-than-expected ADP employment figures and a rise in the 10-year Treasury yield to around 3.78% contributed to a stronger dollar. Federal Reserve Chairman Jerome Powell indicated the solid foundation of the US economy, dampening expectations for rate cuts and boosting the dollar's value. Leah Traub, a portfolio manager at Lord Abbett, noted that the Fed's hawkish stance on monetary policy, combined with the BoJ's reluctance to continue rate hikes, is a double blow to the yen.
