Ueda signals BOJ remains on rate hike path after PM meet

[TOKYO] Governor Kazuo Ueda told Prime Minister Sanae Takaichi that the Bank of Japan is in the process of slowly dialling back its easing support for the economy, signalling his unshaken intention to carefully raise rates.

“The mechanism for inflation and wages to grow together is recovering,” Ueda told reporters on Tuesday (Nov 18) after his first bilateral meeting with the premier. “Given this, I told the prime minister that we are in the process of making gradual adjustments to the degree of monetary easing.”

The two met at a time when investors are seeking clarity over Takaichi’s stance on monetary policy and await details of an economic package expected to be unveiled this week. Given Takaichi’s past reputation of being against rate hikes, market participants were closely watching what messaging emerges from the pair’s meeting.

Stocks and government bonds have tumbled this week, with benchmark 10-year yields touching a 17-year high. The yen weakened past the key psychological threshold of 155 per dollar Tuesday and touched a record low of 180 against the euro.

“We of course discussed foreign exchange rates,” Ueda said while adding that it’s desirable for currencies to move stably while reflecting fundamentals. “We will closely monitor its impacts on the economy while closely cooperating with the government.”

The yen was trading around 155 against the dollar shortly after Ueda’s remarks. It hit 155.38 earlier on Tuesday, the weakest level since January, partly due to market speculation that a BOJ rate hike might be delayed.

“Ueda probably had to send a fresh reminder that the BOJ continues to look at hiking rates given the rapid fall in the yen,” said Kento Minami, an economist at Daiwa Securities. “Takaichi shouldn’t have a problem with doing that as a weak yen may bring more inflation that will hit households.”

The BOJ will make appropriate policy decisions based on data, Ueda said. The central bank delivers its next policy decision on Dec 19.

By refraining from publicly commenting on her meeting with Ueda for now, Takaichi has avoided further fuelling some market views that she’s putting pressure on the BOJ to slow its pace of rate hikes. Had she made any explicit comments against the BOJ’s current path, she could have invited a weaker yen, adding to inflationary pressures via higher import costs. Prime ministers rarely comment after similar meetings with BOJ governors.

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Takaichi’s ruling Liberal Democratic Party suffered two losses in key national elections in the last 13 months due in part to voter frustration over soaring costs of living. Takaichi has vowed to help households with utility subsidies and cuts to the gasoline tax.

Japan’s key inflation gauge has risen at or above the BOJ’s target for three and a half years. In a Bloomberg survey last month, about half of 50 economists said they expected the policy rate to be raised from 0.5 per cent on Dec 19. Almost all of them predicted a move no later than January.

The Takaichi-Ueda gathering took place a day after a government report showed that Japan’s economy contracted 1.8 per cent on an annualised basis over the summer, the first decline in six quarters. Economists said that while the actual state of the economy isn’t as bleak as the headline figures indicated, the report will likely encourage Takaichi to pursue an ambitious fiscal stimulus plan.

Fiscal risks have become a key topic among global investors as seen in the UK last week. Earlier Tuesday, a group of ruling Liberal Democratic Party members formally urged Takaichi to compile a stimulus package that greatly exceeds her predecessor’s plan a year ago.

The International Monetary Fund estimates that Japan’s gross public debt will be equivalent to 229.6 per cent of the economy this year, the highest among developed economies. BLOOMBERG