Fed's dovish shift is mixed blessing for BOJ's rate hike plan Via Reuters

Written by Leika Kihara

JACKSON HOLE, Wyoming (Reuters) – A shift by the U.S. Federal Reserve may give the Bank of Japan a break in its battle to cushion the weak yen, but it could complicate its efforts to raise interest rates if the two central banks deviate from policy paths. keep the markets happy.

At the annual conference in Jackson Hole, Wyoming, Fed Chairman Jerome Powell said on Friday “the time has come” to cut rates as rising risks in the labor market give way to further weakness, giving a clear authorization to ease policy.

The comments came hours after BOJ Governor Kazuo Ueda told parliament that while the BOJ will keep an eye on volatile markets, it will continue to raise rates if inflation remains on track to reach its 2% target.

The yen rose against the dollar after Ueda's comments and extended its gains to those from Powell, as markets focused on hopes of a narrowing of the US-Japan interest rate gap.

“The buying of the yen today is understandable as Governor Ueda showed little sign of a change in the BOJ's views and plans following the financial market turmoil earlier this month,” said Derek Halpenny, head of global markets research EMEA at MUFG, in a note to clients.

The reintroduction of the Japanese currency comes as a relief to the BOJ, which has been under political pressure to stem its fall from harming consumption by raising the cost of food and fuel imports.

But the BOJ's rate hike path is fraught with uncertainty as Japan swims against a wave of global rate cuts, which could leave its currency and stock prices vulnerable to uncontrollable volatility.

After seeing the market break down after the BOJ's July rate hike, Japan's central bank is already feeling the need to tread slowly and carefully.

“The domestic and foreign markets remain volatile, so we will be very careful about market developments for now,” Ueda said on Friday, adding that market volatility could affect policy decisions if the board's inflation projections change.

Domestic political considerations also complicate the BOJ's rate hike as Prime Minister Fumio Kishida, who appointed Ueda to the top BOJ post, will step down and pass the baton to the winner of the ruling party leadership race in September.

While most candidates to succeed Kishida have welcomed the BOJ's plan for moderate rate hikes, it is uncertain whether the new prime minister will support higher borrowing costs if volatile markets weigh on corporate profits.

“With so much uncertainty, the BOJ is unlikely to take bold steps,” said former BOJ board member Makoto Sakurai, ruling out the possibility of another rate hike this year. “Until the domestic political situation stabilizes, the BOJ may find it difficult to raise rates,” he said.

A recent poll by Reuters showed most economists expect the BOJ to raise rates again this year, but many see it more likely to happen in December than October.

A DANGEROUS ECONOMY

The BOJ's surprise decision to raise rates in July and Ueda's signal of a rate hike rattled financial markets earlier this month, forcing his deputy to give a grim assurance that no hikes would come until markets stabilize.

The key message from Ueda's remarks to parliament on Friday was that while the BOJ would be in no rush to raise rates, the market's approach would not derail its long-term plan to continue raising borrowing costs, said two sources familiar with its thinking. .

Big data analysis of the BOJ's recent comments underscores the bank's stance on rate hikes and its bias to remain “very positive,” said Jeffrey Young, chief executive of DeepMacro, a US fintech company that makes AI-driven analysis of economic indicators and policymakers. . ' comments.

“Can we get another one by the end of the year? Well, maybe. I think that's what the model says,” he said of the possibility of another rate hike by the BOJ.

“If you have inflation and growth on the strong side, and you have BOJ rhetoric still biased to say that inflation and growth are both good, the only thing that can really stop them from raising rates would be a market crash.”

Some analysts, however, are more cautious about the strength of the Japanese economy. While consumption rebounded in the second quarter, the rising cost of living weighed on family sentiment. The US slowdown could weigh on exports.

“Domestic demand is very weak,” said Sayuri Shirai, an academic at Keio University in Tokyo. “From an economic perspective, there is little reason for the BOJ to raise rates.”