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The Bank of Japan recently issued a signal to raise interest rates, and the weak yen has become the focus of policy
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Hello everyone, today XM Forex will bring you "[XM Group]: The Bank of Japan has recently released a signal to raise interest rates, and the weak yen has become the focus of policy." Hope this helps you! Original content is as follows:
The Bank of Japan is signaling to markets that it may raise interest rates as early as next month, with sources saying it has returned to its previous hawkish statements as concerns about a sharp depreciation of the yen reignite and political pressure to keep interest rates low recedes. During the Asian session on Wednesday (November 26), the US dollar against the yen fluctuated within a narrow range at a high near 156.08, slightly lower than the nearly ten-month high (157.89) set last week.
Two sources said that in the past week, the Bank of Japan has redirected its focus from earlier concerns about the U.S. economy to the inflation risk of a weak yen through policy statements. These signals are intended to remind the market that a December interest rate hike is still within the scope of consideration.
The shift to a hawkish stance also follows last week's key meeting between Prime Minister Takaichi Sanae and Bank of Japan Governor Kazuo Ueda, which appeared to remove immediate political resistance to the new government's move to raise interest rates.
One of the sources pointed out that it is still difficult to determine whether to raise interest rates in December this year or in January next year. It mainly depends on the Federal Reserve’s interest rate decision, which will be announced one week before the Bank of Japan meeting and is expected to affect the trend of the yen.
Both sources said that recent remarks by many officials, including Ueda, reflect the gradual formation of a consensus within the Bank of Japan: the weak yen has become a trend phenomenon and may push up inflation more significantly than before.
Naomi Murata, chief bond strategist at Mitsubishi UFJ Morgan Stanley Securities, said: "The Bank of Japan is obviously now deliberately sending a signal to ensure that it will not surprise the market if it decides to raise interest rates in December."
The survey shows that slightly more than half of economists expect the Bank of Japan to raise interest rates in December.Interest rates will be raised at the next meeting on December 18-19. All respondents predicted interest rates would rise to 0.75% by March next year.
The hawkish tone continues to heat up
More and more policy members of the Bank of Japan believe that the conditions for raising interest rates are mature. Last week, Junko Koeda noted that the Bank of Japan must continue to raise real interest rates due to "relatively strong" price trends.
Kazuyuki Masu said in an interview on Saturday that the time for raising interest rates was "increasingly approaching", which pushed the five-year government bond yield to a 17-year high on Tuesday.
These statements created space for Junko and Masu to form a consensus with the other two hawkish xm-forex.committee members. The two hawkish members of the nine-member policy xm-forex.committee proposed raising interest rates from 0.5% to 0.75% in September and October, but the proposal failed at that time.
Even Kazuo Ueda, who is regarded by the market as the most dovish member of the xm-forex.committee, said in Congress last Friday that the Bank of Japan would discuss the "feasibility and timing" of raising interest rates at subsequent meetings. This is a change in attitude from his previous statement that "there is no preset policy adjustment timetable."
More importantly, a weak yen may affect underlying inflation - a key indicator the Bank of Japan considers when deciding when to raise interest rates, a statement that suggests the central bank now believes exchange rate fluctuations are having a more lasting price impact.
A real desire to normalize monetary policy
After raising interest rates to 0.5% in January, the Bank of Japan has kept borrowing costs stable due to concerns about the impact of U.S. tariffs on the economy.
The Bank of Japan's slow pace of interest rate hikes is one of the reasons for the yen's weakness, and a weak yen exacerbates inflation by pushing up import costs.
Ueda Kazuo is gradually losing his reason to keep interest rates unchanged.
So far, the impact of U.S. tariffs has been limited. Early signs of salary negotiations next year point to a more solid raise, removing another reason for Ueda to be cautious.
While fiscal and monetary dovish Sanae Takaichi became prime minister last month, xm-forex.complicating decision-making, renewed weakness in the yen strengthened the case for a recent rate hike.
As the U.S. dollar rose to a ten-month high against the yen (157.89), Finance Minister Katayama Satsuki said last week that he had "no special objections" to the Bank of Japan's interest rate hike path and emphasized that the government and the central bank will remain vigilant to market trends.
After meeting with Sanae Takaichi last week, Ueda said the prime minister seemed to have approved the central bank's plan to gradually raise interest rates to guide inflation steadily toward the 2% target.
Senior strategist Inatomi Katsutoshi pointed out: "The Bank of Japan will not admit it publicly, but raising interest rates will help curb the yen's decline. Neither Takaichi nor Katayama expressed opposition to another interest rate hike, which increases the possibility of raising interest rates in December instead of January next year."
Of course, there are still variables whether the Bank of Japan can successfully raise interest rates in December without angering Takaichi's reflation advisers in the Prime Minister's Office, who have warnedRisks of interest rate hikes in the near future.
Another xm-forex.complicating factor xm-forex.comes from the Federal Reserve. At the two-day meeting that ended on December 10, the Fed remained divided on whether to cut interest rates.
If the Fed keeps interest rates unchanged or downplays expectations for future rate cuts due to inflation concerns, subsequent strength in the U.S. dollar could weaken the yen and force the Bank of Japan to raise interest rates next month.
On the contrary, if the Federal Reserve cuts interest rates, it can support the yen and relieve the pressure on the Bank of Japan to act immediately. But it will also raise questions about the health of the U.S. economy and the Bank of Japan's future path to raising interest rates.
Nonetheless, the latest hawkish signal from the Bank of Japan is enough to remind the market that there are risks in betting that the central bank will maintain low interest rates for a long time.
Christina Hooper, chief market strategist of Man Group, said: "The current market believes that (the high market) will force the Bank of Japan to maintain low interest rates for a long time... But my point is that the Bank of Japan will still raise interest rates. Normalizing monetary policy is their real demand."
The above content is about "[XM Group】: The Bank of Japan has recently released a signal to raise interest rates, and the weak yen has become the focus of policy. The entire content is carefully xm-forex.compiled and edited by the editor of XM Foreign Exchange. I hope it will be helpful to your trading! Thanks for the support!
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