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The yen strengthened against the dollar and bonds fell after Bank of Japan governor Kazuo Ueda gave one of his clearest indications yet that the central bank might raise interest rates this month.
The yen gained 0.6 per cent against the dollar on Monday to ¥155.24 and yields on rate-sensitive two-year Japanese government bonds rose 0.04 percentage points to 1 per cent, their highest level since 2008. Bond yields move inversely to prices.
“If the outlook for economic activity and prices outlined so far is realised, the bank, in accordance with improvement in economic activity and prices, will continue to raise the policy interest rate and adjust the degree of monetary accommodation,” Ueda said in a speech to business leaders in Nagoya on Monday.
The governor added that “even if the policy interest rate is raised, accommodative financial conditions will be maintained”, implying he saw room for rate increases, according to traders.
The probability of a rate increase at the BoJ’s meeting on December 19 jumped to 75 per cent from about 60 per cent following Ueda’s speech, according to overnight index swaps. Stocks fell, with the Nikkei 225 index down 1.9 per cent and the Topix retreating 1.2 per cent.
Ueda’s “remarks clearly signalled the possibility of the next rate increase, particularly at the December meeting”, said Shoki Omori, chief desk strategist at Mizuho.
JGBs and the yen have been under pressure in recent weeks on concerns over a public spending surge under Prime Minister Sanae Takaichi. Last month she unveiled a ¥21.3tn ($135.4bn) package designed to spur economic growth and shield households from the rising cost of living.
Ueda on Monday said raising the policy interest rate was part of “a process of easing off the accelerator as appropriate towards achieving stable economic growth and price developments, not about applying the brakes on economic activity”.
Economists noted that the BoJ’s increased hawkishness put it at odds with the government’s ambitious spending plans.
“The government is pushing on the accelerator and the BoJ is taking its foot off the accelerator,” said Marcel Thieliant, Asia-Pacific head at Capital Economics. “It’s not consistent with what the government wants, but the BoJ would tell you it’s economic logic.”
Omori pointed out that Ueda had addressed risk factors in more concrete terms than previously.
He “identified the exchange rate and import prices not merely as temporary cost-push factors but as risks that could lift inflation expectations and the underlying inflation rate”, Omori said.
“Regarding wage momentum, citing increases in the minimum wage and evidence from corporate surveys, he conveyed a degree of confidence that relatively strong wage gains are likely to continue into next year.”
Ueda’s comments follow statements from other BoJ board members in recent weeks. Kazuyuki Masu told Nikkei last month that although he could not say which month a rate increase would come, “in terms of distance, we are in a relatively close position”.