The Japanese yen faces a new challenge as currency strategists in Tokyo raise concerns about the Bank of Japan (BOJ) potentially delaying interest rate hikes until March or later. This potential delay has sparked uncertainty in the market and raises questions about the future direction of the yen.
Table Content:
Market Reacts to Potential BOJ Inaction
The yen recently experienced its weakest performance in over two weeks following a Bloomberg report suggesting BOJ officials see minimal downside in postponing rate increases. While the yen only weakened to 152.82 against the dollar amidst discussions about a December or January rate hike, a subsequent Reuters report indicating a lack of urgency among policymakers further fueled concerns.
Potential for Yen Carry Trade Resurgence
Shusuke Yamada, head of Japan currency and rates strategy at Bank of America Corp. in Tokyo, warns that a prolonged delay could significantly impact the yen. A rate hike postponement until March could reignite the yen carry trade, potentially pushing the currency back to 155 or even near the 157 level seen in November. This scenario underscores the sensitivity of the yen to BOJ policy decisions.
Conflicting Signals and Market Uncertainty
Although a Bloomberg survey reveals 44% of economists anticipate a BOJ rate hike next week and 52% predict a January increase, overnight indexed swaps paint a different picture. These derivatives suggest a mere 15% chance of a December hike, with probabilities rising to 76% for January and 94% by March. This divergence in expectations contributes to market uncertainty.
Risk of Mistrust and Further Yen Depreciation
Takeru Yamamoto, a trader at Sumitomo Mitsui Trust Bank in New York, highlights the risk of eroding market trust if the BOJ fails to raise rates in January. Such a scenario could trigger a significant yen sell-off, potentially pushing it back to the high 150s. This emphasizes the importance of clear communication and decisive action from the BOJ to maintain market confidence.
Internal Debate Within the BOJ
BOJ Governor Kazuo Ueda recently hinted at imminent rate hikes in a Nikkei interview. However, a subsequent Jiji Press report revealed growing internal concerns about a premature move. Furthermore, dovish policy board member Toyoaki Nakamura expressed his need for data-driven decision-making this month, adding to the complexity of the situation.
Varying Expert Opinions on Rate Hike Timing
Eiichiro Miura, head of Nissay Asset Management Corp.’s strategic investment department, believes a rate hike is unlikely before April or later. Conversely, Carol Kong, a currency strategist at Commonwealth Bank of Australia in Sydney, suggests a further yen depreciation might compel the BOJ to act sooner. She points to the potential impact of upcoming US inflation data and a potentially hawkish Federal Reserve message on the yen’s trajectory.
Conclusion: Yen’s Future Remains Uncertain
The yen’s trajectory remains highly dependent on the BOJ’s next move. While conflicting signals and internal debates cloud the outlook, the potential for a prolonged delay in rate hikes poses significant risks to the currency. Market participants will closely monitor upcoming data releases and policy statements for clues about the BOJ’s intentions and their implications for the yen.
