(Bloomberg) -- Japan’s Prime Minister Shigeru Ishiba said the economy isn’t ready yet for further interest-rate hikes, in comments that jolted the yen.
“I don’t think the environment is ready for an additional rate hike,” Ishiba said Wednesday in unusually strong comments on monetary policy for a Japanese prime minister. “I told the governor that my hope is the economy will make progress in a sustainable manner toward the end of deflation with monetary easing trend in place,” he said, referring to Bank of Japan Governor Kazuo Ueda.
The currency fell to as weak as 144.89 against the dollar from around 144.18 just before the comment as investors reacted to the likelihood Ishiba’s new administration will put a brake on the central bank. The yen extended losses to roughly 1% on the day, leading Group-of-10 losses against the greenback after stronger-than-expected US jobs data.
The comments came after a flurry of signaling on the first full day of Ishiba’s new government that it has no desire for now to see the central bank raise borrowing costs further. Ministers played down the premier’s appetite for monetary policy normalization and highlighted the need for the central bank to focus on the unfinished task of eradicating deflation.
This will encourage market participants to “rebuild yen shorts in anticipation that the BOJ will be under more political pressure to slowdown the pace of rate hikes,” said Lee Hardman, a senior currency analyst at MUFG. “The sharp strengthening of the yen and financial market instability over the summer have helped to ease upside risks to inflation in Japan.”
Bets funded using the Japanese currency were painfully unwound in August. The so-called carry trade blew up as fears of a US slowdown prompted markets to ramp up expectations for Federal Reserve easing, while the BOJ moved to hike interest rates, narrowing the gap with those in the US.
Most BOJ watchers already expected the bank to hold its benchmark settings steady when the board next sets policy at a meeting ending Oct. 31, with the next hike forecast to come most likely in December of January.
Ishiba also spoke with US President Joe Biden and South Korean leader Yoon Suk Yeol as he looked to underscore from the get-go the importance of ties with key allies amid growing security tensions in Asia.
At the meeting between Ishiba and Ueda, the central bank chief qualified his commitment to raising interest rates if the economy and prices match the BOJ’s forecasts, according to his comments after the talks.
“While we will adjust the degree of monetary easing if the economy and prices match our forecasts and the economy works as we expect, I also told him we want to look carefully to see if that really is the case because we have sufficient time to do so,” Ueda told reporters at the prime minister’s residence.
Ueda told reporters that Ishiba didn’t make any specific policy requests during their discussion, a standard line delivered by central bank chiefs to keep a lid on speculation after such meetings. Ueda already sent dovish signals regarding the policy outlook earlier in the day by emphasizing the need to continue monitoring the impact of global markets and economies on domestic activity during a speech.
While it’s common for Japan’s central bank chief to hold regular meetings with the nation’s leader, Ueda’s visit came at an unusually early stage of the new administration, an indication that Ishiba’s government is determined to coordinate closely with the central bank.
“Ishiba would not want to rock the policy boat this early in his term,” said Valentin Marinov, head of G-10 FX strategy at Credit Agricole CIB. “The BOJ remains fiercely independent and I doubt that there would be a strong case for any government intervention in the BOJ policy making.”
Earlier in the day a key ally of the premier said Ishiba didn’t unconditionally support the raising of interest rates, in another sign of initial caution on monetary policy in the new administration.
“There are various conditions that need to be met for a hike. The top priority is overcoming deflation,” Ryosei Akazawa, the minister for economic revitalization in Ishiba’s new cabinet, told reporters.
Newly appointed Finance Minister Katsunobu Kato also took a cautious stance when asked about the BOJ, and echoed the view that defeating deflation should be the top priority.
“My hope is the BOJ will appropriately conduct monetary policy toward its stable 2% inflation target,” Kato told reporters in his inaugural presser. “I also hope the central bank will conduct careful communication with the market.”
--With assistance from Alastair Gale.
(Adds more details from press conferences and calls)
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