(Bloomberg) -- Traders have been perplexed over the past week as to when the Bank of Japan may hike rates following comments from officials and media reports that sent mixed signals of the BOJ intentions.
The confusion has caused sharp swings in market bets on rate hikes, with overnight indexed swaps pricing in a 19% chance of a December rate increase, tumbling from 60% at the beginning of last week. The yen has weakened to 152.18 per dollar this week from 150 last Friday, and traded around 151.77 in Tokyo Wednesday.
BOJ Governor Kazuo Ueda’s remarks in a Nikkei interview last month that hikes are “nearing” were followed a few days later by a Jiji Press report highlighting growing concern inside the central bank about a premature rate hike. Dovish policy board member Toyoaki Nakamura said last week that he doesn’t object to a rate hike but would have to look at data to decide on policy this month.
Ueda has largely been praised for his clear and methodical communication, which is seen as a departure from his predecessor Haruhiko Kuroda, who often shook markets around the world with his surprise decisions. But the central bank also came under fire when its July rate hike helped set off a historic plunge in Japanese stocks and global market turmoil, with the recent communication giving traders déjà vu.
“I don’t know what the BOJ wants to do — after July, I had hoped for improved communication with the market, but it hasn’t changed,” said Keiko Onogi, senior JGB strategist at Daiwa Securities Co. “If they say they’re not going to hike, the yen will weaken, which is probably what’s causing the strange communication.”
Central banks are under no obligation to tell traders exactly what they are going to do, but the more surprises they spring, the greater the chance of abnormal market volatility that could disrupt long-term investment in an economy.
“The BOJ, to its credit, has been trying to establish a more effective communication strategy to give markets somewhat of an anchor,” said Frederic Neumann, chief Asia economist at HSBC Holdings Plc. “Still, investors are left wondering whether the BOJ will really take the plunge next week, or defer to next year.”
Japan’s central bank also scheduled a speech and press briefing by Deputy Governor Ryozo Himino right before its January meeting. The yen extended its losses against the dollar following news of the event, signaling that some investors took this as a hint that the central bank may hike next month instead of December.
“It’s dangerous to make a decision by reading too much into the date of the speech,” said Ryutaro Kimura, a fixed income strategist at AXA Investment Managers in Tokyo. “If the BOJ thinks it can raise rates in January, there shouldn’t be a reason why it can’t do so in December.”
Board member Nakamura said in his comments last Thursday that a decision hasn’t been made for December, and that he’s closely watching the BOJ’s Tankan report that will come out this week. Investors will also be keeping an eye on US consumer price index data tonight and the Federal Reserve’s policy outlook.
“There is a possibility that complex communication will continue until just before the December meeting,” wrote Ataru Okumura, senior rate strategist at SMBC Nikko Securities Inc., in a note. “If the Bank of Japan is still undecided about its decision this time too, there is a possibility that the December rate hike theory will once again become dominant.”
--With assistance from Saburo Funabiki, Masahiro Hidaka and Umesh Desai.
(Updates prices and adds economist quote.)
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