(Bloomberg) -- The Bank of Japan will continue to adjust policy provided the economy performs in line with projections, board member Junko Nakagawa said in comments that sent the yen to its highest level this year.
While her remarks were largely in line with the BOJ’s standing policy stance, they came at a time when investors are intensely focused on the narrowing of the interest rate gap between Japan and the US — and just as Democrat Kamala Harris and Republican Donald Trump sparred in their first debate.
“I think that the degree of monetary easing will be adjusted if the outlook for Japan’s economy and inflation is realized,” Nakagawa said in a speech to local business leaders in Akita, northern Japan. “The current level of real rates is extremely low.”
The yen gained as much as 1.2% to 140.71 against the greenback, then later trimmed a large part of the move in jittery trading. Japanese stocks, which have benefitted from a weak yen, fell to the lowest level in more than a month.
“The market moves are reflection of lingering nervousness over the BOJ’s policy outlook after the July rate hike, but I don’t expect the yen to keep appreciating as a result of Nakagawa’s comments,” said Shotaro Mori, senior economist at SBI Shinsei Bank. “With high volatility in the market, the BOJ won’t be raising rates this month.”
Others see the yen advancing further, with Homin Lee, senior macro strategist at Lombard Odier Singapore Ltd., expecting the yen may strengthen toward the mid-130s level against the dollar in the next 12 months.
While most BOJ watchers expect the central bank to hold interest rates steady at its meeting next week, Nakagawa’s comments serve as a reminder that rate hikes at a later date are still in the pipeline should the economy and prices continue in line with forecasts.
She noted that revised GDP and wage data released after the July meeting showed that the economy had remained on track in the months after the BOJ conducted its first rate hike in 17 years in March.
“I’m taking them as positive signs,” she noted in an afternoon press conference. “As far as we can see, the economy’s performance has been on track to some extent since the changes made in March, as expected at the meeting in July.”
BOJ officials see little need to raise the benchmark rate this month, as they’re still monitoring lingering volatility in financial markets and the impact of the July hike, people familiar with the matter told Bloomberg earlier.
Most economists expect the BOJ to wait until December or January before making its next move.
Nakagawa noted it’s important to assess whether market moves following the bank’s July 31 hike will affect the outlook and certainty for achieving 2% inflation target. By pointing that out, Nakagawa indicated there is no need to rush ahead with another hike.
Nakagawa’s remarks on the low level of real rates suggest she thinks there is room for a series of rate hikes. The BOJ’s borrowing costs are set at 0.25%, the lowest among its major peers.
Speaking about risks, Nakagawa placed upside inflation risks at the top of the central bank’s watchlist as price setting behavior among companies may become more active if import prices rise again, or if labor shortages trigger an upside surprise for wage growth.
“The first risk I want to mention is upside inflation risk,” she said. “There is a chance that wage growth will deviate upward from our scenario due to a tight labor market so we need to see if wages and inflation exceed our price stability target.”
Nakagawa, a former CEO of Nomura Asset Management, has supported every board decision since joining it in June 2021.
--With assistance from Sumio Ito.
(Updates with comments from economist, latest market moves)
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