BOJ’s Ueda faces hurdles in raising rates after market signals shift

The Governor of the Bank of Japan (BOJ), Kazuo Ueda, encounters a more challenging situation regarding increasing interest rates in the second half of his five-year term, as Sanae Takaichi, a Member of the House of Representatives of Japan who is a critic of interest rate hikes, won the leadership in the ruling party.

While Ueda faces a tough choice, the central bank has demonstrated its readiness for its first interest rate increase since January. This interest rate hike is expected to occur later this month.

However, following Takaichi’s victory, if Ueda decides to proceed with the hike, he might upset a senior official who may desire more influence over the Bank of Japan’s future decisions. 

Ueda faces a difficult situation in deciding on interest rate hikes

During the latter part of his term, Ueda is likely to be judged by individuals not only on how much he can increase interest rates but also on how effectively he can maintain the central bank’s independence.

Concerning the situation, reports from reliable sources have highlighted that if the BOJ’s governor decides not to increase rates, as Takaichi’s economic advisers had suggested earlier, analysts speculate that he supports Takaichi’s critical approach to interest rate hikes.

Consequently, this could further diminish the yen’s value, posing a significant challenge for both Ueda and Takaichi regarding currency matters as they await the next policy meeting scheduled for the next two months.

In a statement, Tsuyoshi Ueno, a chief economist at the NLI Research Institute, pointed out that he has noticed an emerging prospect of an interest rate hike in October, following strong signals from the BOJ and reports on economic progress. However, Ueno also raised concerns that the increasing rates would become more difficult due to Takaichi’s victory.

In the meantime, Ueda has showcased his dedication to addressing the leftover impacts of the BOJ’s large stimulus program as the country adapts to increasing inflation.

Interestingly, he has already exceeded expectations by implementing strategies such as ending the bank’s influence on bond yields, reducing its large purchases, and ceasing other risky assets. Additionally, he plans to sell off exchange-traded funds before hitting the midpoint of his term.

Many believe that increasing rates slowly from negative levels makes sense because inflation is still occurring.

Takaichi’s victory raises concerns about interest rate hikes 

When the Bank of Japan moved to hike interest rates last year, Takaichi referred to the plan as “stupid,”  leading investors to think she would halt rate rises if she became prime minister. This comes when she is expected to be elected as premier in a parliamentary vote in mid-October.

“Ueda has done well in the first half of his term, but I think Takaichi is going to be harsher on him,” Ueno said. He made this remark in reference to her tendency to get involved in the BOJ’s plans whenever they consider making amendments to the policy settings.

Responding to the situation, investors have drastically decreased their expectations for the BOJ’s move this month. On the other hand, Overnight swaps a week ago signaled a 68% probability of a hike in October, following two board members’ endorsement of an increase in September, and one typically dovish member sounded more hawkish. Later, that likelihood had fallen to just over 20%.

Takaichi’s economic adviser greatly supported this shift on Monday this week. This was after Etsuro Honda told reporters it may be too early for a hike this month.

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