Bank of Japan Governor Kazuo Ueda is scheduled to speak to parliament on Friday, facing the delicate task of informing policymakers of possible future monetary policy amid current market volatility.
Japanese stock markets have been steadily rising recently, with the index hitting an all-time high, while the yen fell to a low of 141 yen against the US dollar earlier in August, from 160 yen earlier this year, as the carry trade on the yen was largely cleared.
Japanese interest rates are also recovering, but are likely to lag behind the recovery in stock prices and the pair, according to analysts at Nomura, in a note dated August 20.
Easing concerns about a US economic recession have helped stock prices rebound and the yen fall.
“We believe the BOJ wants to avoid a return to sustained yen weakness and destabilization of the stock market,” Nomura said. “From this perspective, BOJ Governor Ueda’s testimony scheduled for next Friday is likely to be more dovish than his post-policy press conference in July, but more hawkish than Deputy Governor Uchida’s remarks on Aug. 7.”
The bank added that if BOJ Governor Ueda’s view that he does not consider 0.5% the upper limit for the interest rate remains unchanged, the current pricing of the final rate in the yen interest rate market is likely to be too low.
However, there appears to be a lack of immediate catalysts for higher eventual interest rate expectations, and the recovery in 5-year Japanese government bond yields may lag behind the recovery in equity prices and the USD/JPY pair.
Although the hawkish shift the Bank of Japan made at its July policy meeting came at the cost of increasing instability in the Japanese stock market, it achieved its primary goal of limiting the yen’s decline.
At a press conference on August 7, Bank of Japan Deputy Governor Shinichi Uchida made cautious remarks aimed at calming the stock market.
However, if the BOJ focuses too much on stock prices and the yen resumes its decline, the BOJ could find itself back to square one.
“We believe the BOJ is in a very difficult position where its communications need to be hawkish enough to avoid a return of stock market instability while avoiding a return to yen depreciation,” Nomura added.