(Bloomberg) -- Comments from the Bank of Japan signal discomfort with recent market turbulence, and augur less potential upside for the yen going forward, according to market watchers.
Asian stocks rose and the yen fell after Deputy Governor Shinichi Uchida sent a strong dovish signal following recent volatility in global markets, where dollar-yen fell to as low as 141.70 on Monday.
The yen has surged almost 10% this quarter, triggering an unwinding of carry trade positions and pressuring Japanese stocks. Both of Japan’s key equity gauges fell more than 12% on Monday, sinking into bear markets on expectations of more rate hikes.
Uchida’s comments were the first public remarks by a BOJ board member since the bank hiked interest rates on July 31.
Here’s what strategists and market watchers are saying:
Yen Near 145
Uchida’s comments “can bring some stability to the Japanese equity market for now, but it cannot take the focus away from US economic data and recession concerns, which have also been a huge catalyst in the move down we have seen recently,” said Charu Chanana, head of currency strategy at Saxo Markets.
“Putting in fresh carry trades remains tough in this environment of higher volatility and nervousness about the US economy,” she said. “The Japanese yen could settle in a range around the 145-mark for now, but risk-reward remains tilted toward further strengthening as the Fed embraces rate cuts.”
Limited Yen Upside
“The whole government, not just the BoJ, has been shocked by the market turbulence of recent days,” said Alvin Tan, head of Asian currency strategy at Royal Bank of Canada in Singapore. “They understand now that the BOJ’s hawkish turn last week will have negative repercussions on Japan if the US is going into a material economic slowdown.”
The downside in dollar-yen is going to be limited, unless global volatility surges again like on Monday, he said. The 140 level on the cross “should hold, again unless there is huge flight to safety around the world. I do think the upside is also limited now.”
Discomfort
The outsized yen rally is making policymakers uncomfortable, which is evident from BOJ Deputy Governor Shinichi Uchida’s comments on interest rates, according to Moh Siong Sim, Singapore-based FX strategist at Bank of Singapore.
This is “even though strengthening wage momentum bodes well for consumer spending, which supports the prospect for further BOJ tightening,” he said.
Yen Decline
“The yen is likely to fall,” said Hirofumi Suzuki, chief foreign-exchange strategist at Sumitomo Mitsui Banking Corp. “The yen is still volatile in the financial markets and the risk of a rise in the yen is unpredictable, but I think that the 141.70 yen per dollar mark set on Monday is now far from over.”
Uchida’s statement “implicitly acknowledged that the BOJ is finding it difficult to raise interest rates for some time to come. As for a rate hike, the fastest it could be is December, and I personally expect a hike in January next year.”
Hesitant BOJ
The BOJ will likely be gun-shy about hiking rates again soon, which will weigh on the the yen, said David Forrester, Singapore-based senior FX strategist at Credit Agricole CIB.
--With assistance from Daisuke Sakai.
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