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The yen strengthened against the dollar and bonds fell after Bank of Japan Governor Kazuo Ueda gave one of his clearest indications yet that the central bank could raise interest rates this month.
The yen gained 0.6 percent against the dollar on Monday to ¥155.24 and yields on two-year rate-sensitive Japanese government bonds rose 0.04 percentage points to 1 percent, their highest level since 2008. Bond yields move inversely to prices.
“If the outlook for economic activity and prices described so far is realized, the bank, depending on the improvement in economic activity and prices, will continue to increase the policy interest rate and adjust the degree of monetary easing,” Ueda said in a speech to business leaders in Nagoya on Monday.
The governor added that “even if the key interest rate was raised, accommodative financial conditions would be maintained,” implying that he saw room for rate hikes, according to traders.
The probability of a rate hike at the BoJ’s December 19 meeting rose from around 60 percent following Ueda’s speech to 75 percent, according to overnight index swaps. Stocks fell, with the Nikkei 225 index down 1.9 percent and the Topix down 1.2 percent.
Ueda’s “remarks clearly signaled the possibility of an upcoming rate increase, especially at the December meeting,” said Shoki Omori, chief strategist at Mizuho.
The JGB and the yen have been under pressure in recent weeks due to concerns over increased government spending under Prime Minister Sanae Takaichi. Last month, it unveiled a 21.3 billion yen ($135.4 billion) plan to boost economic growth and protect households from the rising cost of living.
Ueda said on Monday that the increase in the key interest rate was part of “a process aimed at easing the accelerator, where necessary, to achieve stable economic growth and price developments, and not the application of brakes on economic activity.”
Economists noted that the BOJ’s increasing tone put it at odds with the government’s ambitious spending plans.
“The government is stepping on the accelerator and the BoJ is taking its foot off the accelerator,” said Marcel Thieliant, head of Asia-Pacific at Capital Economics. “It’s not in line with what the government wants, but the BoJ would tell you it makes economic sense.”
Omori emphasized that Ueda addressed risk factors more concretely than before.
It “identified the exchange rate and import prices not only as temporary cost-push factors, but also as risks that could push up inflation expectations and the underlying inflation rate,” Omori said.
“As for wage dynamics, citing minimum wage increases and business survey results, he expressed some confidence that relatively strong wage increases are expected to continue next year.”
Ueda’s comments follow statements by other BOJ board members in recent weeks. Kazuyuki Masu told Nikkei last month that while he couldn’t say which month a rate increase would come, “in terms of distance, we are in a relatively close position.”
