"Limited Yen Weakness... Expected 142-147 Yen Until Q1 Next Year"

BOJ Base Interest Rate Held at -0.1%
No Mention of YCC Normalization

[Image source=Yonhap News]

As the Bank of Japan (BOJ) kept its policy rate unchanged, an analysis suggested that the depreciation of the yen would be limited due to the decline in U.S. market interest rates.

Jung-Hoon Lee, a researcher at Eugene Investment & Securities, stated, "The normalization of the Bank of Japan's (BOJ) monetary policy is likely to occur around the 2nd to 3rd quarter next year, when the effects of wage negotiations in spring and the U.S. Federal Reserve's (Fed) interest rate cuts can be confirmed."

At the previous day’s Monetary Policy Meeting, the BOJ maintained the short-term interest rate at -0.1% and continued its large-scale monetary easing policy (YCC) aimed at guiding the 10-year government bond yield, a long-term interest rate indicator, to around 0%. Contrary to market expectations, there was no mention of normalizing the YCC.

BOJ Governor Kazuo Ueda said at a press conference that it is difficult to clearly indicate the future policy path. He explained that the BOJ would monitor the virtuous cycle between wages and prices and operate policy considering the Fed’s rate cuts. However, he clearly stated that it would be inappropriate to change policy based on assumptions about the Fed’s direction. In other words, the BOJ plans to intensify tightening policies such as rate hikes after further observing wage and price conditions.

Although Japan’s economy showed a slowdown with a negative GDP growth rate in the third quarter, it continues a gradual recovery. The researcher noted, "The Tankan index, a business sentiment indicator in Japan, actually rose, indicating that corporate sentiment was surprisingly not bad," and added, "The export growth rate is also likely to rebound from early next year as the base effect dissipates."

He diagnosed, "Ultimately, the BOJ believes that if real wages improve through wage increases, the Japanese economy can continue a more stable recovery. This is why Governor Ueda said he would observe the cycle between wages and prices."

Researcher Lee predicted, "Although there were no hints of normalization, since U.S. market interest rates have fallen, the depreciation of the yen will be limited," and forecasted, "The yen is expected to fluctuate in the mid-140s per dollar range until the first quarter of next year."