(Bloomberg) -- The yen led gains among Group-of-10 currencies, Japanese bond futures fell and stocks fluctuated as the central bank indicated that it is likely to continue to raise interest rates.
The Japanese currency rose 0.6% to 145.46 per dollar as of 3:54 p.m. in Tokyo. Benchmark stock indexes swung from an early advance to a decline and then edged back up again after the lunchtime break as traders mulled the outlook for monetary policy. Futures for 10-year government debt were little changed at 144.63.
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Bank of Japan Governor Kazuo Ueda said that policymakers can add to hikes made in March and July if the economy and prices are in line with their expectations. Speaking in parliament on Friday, Ueda cited concerns about the US economy when asked about recent market turmoil, while noting that he remains cautious about instability in financial markets.
“While BOJ Governor Ueda is trying not to rock the boat too much, the yen is getting a lift from his comments,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets. Tan said that Ueda is “effectively confirming that policy normalization will not only proceed but still has ways to go.”
The BOJ has come under harsh criticism for its communication style, which has kept traders guessing about its policy aims. This became particularly apparent when Deputy Governor Shinichi Uchida took a more dovish stance than what came out from the July policy meeting. Uchida’s comments suggested to some investors that rate hikes would be off the table at times of market volatility. When questioned on this Friday, Ueda said Uchida’s comments were appropriate, but that he would carefully communicate to ensure that markets aren’t taken by surprise.
Ueda signaled the BOJ is likely on a path to future rate hikes but he didn’t say that they were imminent. Nearly 70% of economists surveyed by Bloomberg in early August see another increase this year, while overnight-indexed swaps data show a 41% possibility of a hike by the BOJ’s December policy meeting.
Although the domestic political outlook in Japan remains cloudy with little clarity on who will be the new leader of the ruling Liberal Democratic Party, Ueda emphasized that the BOJ will keep aiming at its price stability goal after Prime Minister Fumio Kishida is replaced. Traders are also awaiting Federal Reserve Chairman Jerome Powell’s speech at Jackson Hole for further clues on where the markets will go from here.
Here’s what analysts and strategists had to say on Ueda’s appearance in parliament:
Carol Kong, a currency strategist at Commonwealth Bank of Australia
Judging by the lift in the JPY, Governor Ueda’s remarks so far are more hawkish than what markets had anticipated. Though Ueda merely repeated his guidance at the July meeting that the BOJ is not done raising rates.
But more important to the JPY will be Powell’s speech later today.
Charu Chanana, head of currency strategy at Saxo Markets
These comments will leave the yen to the mercy of Powell and what US data signals in the weeks ahead. Risk-reward is tilted towards a stronger yen, but with speculative short positioning being wiped out, USD/JPY needs a fresh trigger to extend its slide beyond 142.
Keeping the door open for further rate hikes is positive for yen and negative for stocks at the margin.
Takahiro Otsuka, senior fixed-income strategist at Mitsubishi UFJ Morgan Stanley Securities
He balanced his comments with both hawkish and dovish views.
Shoki Omori, chief desk strategist at Mizuho Securities
The script itself seems like it avoided content on rate expectations and the BOJ’s communication style.
It appears that the BOJ sought to avoid any actions that might further disrupt the markets, particularly in the lead-up to the Jackson Hole Symposium.
Eugenia Victorino, SEB’s head of Asia strategy
Governor Ueda’s statements this morning show he has not changed his stance though he is looking for more certainty, presumably on market movements.
We expect the next hike from the BOJ to come in December, in line with the gradual approach of the Gov Ueda.
Teppei Ino, Tokyo head of global markets research at MUFG Bank
Ueda also lightly touched on the issue of neutral rates, indicating that the BOJ has not changed its stance on proceeding with monetary normalization.
It was confirmed that the BOJ has not returned to a dovish stance. This confirmation also supports the current move toward a stronger yen.
--With assistance from Hidenori Yamanaka and Daisuke Sakai.
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