BOJ Deputy Governor Signals Caution on Interest Rate Hikes Amid Market Volatility

Shinichi Uchida, Deputy Governor of the Bank of Japan (BOJ), has signaled that the central bank will refrain from increasing interest rates while market conditions remain unstable. Uchida’s comments, made on Wednesday, contrast with the recent hawkish stance of BOJ Governor Kazuo Ueda, who last week surprised markets with an unexpected interest rate hike.

Uchida’s remarks came amid sharp market fluctuations, which had previously caused the Nikkei share average to drop significantly, almost matching the losses of Japan’s 1987 “Black Monday.” The yen had surged as investors fled risk assets, and safe-haven currencies like the Swiss franc gained traction. The resulting market turmoil led to circuit breakers being triggered across Asian stock exchanges.

In his speech to business leaders in Hakodate, Uchida acknowledged the impact of the recent market volatility on the BOJ’s policy decisions. He noted that the instability could influence the central bank’s economic and inflation projections, which are critical for determining the trajectory of interest rates. Uchida emphasized that the current environment necessitates maintaining monetary easing to support economic stability.

“The recent volatility in domestic and international financial markets obviously complicates the BOJ’s rate hike path,” Uchida said. He stressed the need for caution, given the fluctuating market conditions and their potential impact on inflation and economic activity. Uchida’s comments were seen as dovish compared to Governor Ueda’s recent signals that further rate hikes could be on the horizon.

Uchida’s cautious stance is notable in light of the BOJ’s recent policy shifts. Last week, the BOJ raised interest rates to levels not seen in 15 years and detailed plans to reduce its extensive bond-buying program, signaling a move towards unwinding years of stimulus. Governor Ueda had indicated that the BOJ might continue raising rates if economic conditions and inflation align with its projections.

The contrast between Uchida’s dovish tone and Ueda’s hawkish remarks contributed to market confusion. The yen weakened to 146.84 against the dollar following Uchida’s comments, while the Nikkei average rebounded by 1.2% after a 10% drop the previous day. The yield on 10-year Japanese government bonds fell slightly to 0.875%.

Economists are divided on the implications of Uchida’s comments. Hiroshi Kawata of Mizuho Research & Technologies noted that the high market volatility raises the barrier for a rate hike in October, suggesting that the BOJ may wait longer before implementing further increases. Toru Suehiro of Daiwa Securities echoed this view, predicting that the BOJ might only raise rates in December if US recession fears abate by then.

Uchida’s remarks underscore the BOJ’s challenge in navigating economic policy amid fluctuating global and domestic conditions. As Japan’s economy recovers and the US economy is expected to achieve a soft landing, the BOJ faces complex decisions on how to balance monetary policy to support growth while managing inflationary pressures.