The yen dropped 1% versus the dollar after Bank of Japan Governor Kazuo Ueda pushed back against bets for a near-term interest rate hike, saying it’s difficult to lay out a plan for an exit.
The currency weakened as far as 144.25 per US dollar before trading at 144.15 as of 5.04pm in Tokyo. Japan’s benchmark 10-year sovereign bond yield fell three basis points to 0.635%. The Nikkei 225 closed 1.4% higher.
Ueda’s comments in a press conference came after the central bank kept its ultra-accommodative policy intact, as expected, at a meeting earlier in the day.
“The yen reaction shows that clearly there is some disappointment in the market that Ueda did not lay down the groundwork for a specific exit policy,” said Jane Foley, head of FX strategy at Rabobank.
The yen has strengthened over the past month, with gains accelerating in recent weeks as investors positioned for the BOJ to end negative rates early next year, and after the Federal Reserve signalled a pivot to interest-rate cuts in 2024. The currency had tumbled to this year’s weakest level of 151.91 in November.
Meanwhile, Japan’s stock market has come off its 2023 highs and declined in recent weeks in conjunction with the yen’s advance. The 10-year bond yield is down from as high as 0.97% on Nov 1.
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Comments earlier in December from Ueda and one of his deputies sparked speculation of exit from sub-zero interest rates as early as this month, triggering volatility in the yen. The view subsided after people familiar with the matter said the central bank saw little need to rush to scrap the policy this month.
“Some market participants may have positioned for a policy change today and needed to cover the position, but I doubt a rally in dollar-yen and Japanese stocks continues long as the fear over the January meeting will arise soon unless Ueda strongly denies it at the presser,” said Naka Matsuzawa, chief strategist at Nomura Securities Co.
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Prime Minister Fumio Kishida said last week the government and the central bank coordinate policy closely via policy accord and the both parties have confirmed it. In a 2013 joint statement, the government and central bank agreed to strengthen coordination with BOJ committing itself to achieving 2% inflation while government makes efforts to revitalize the economy.
Central bank watchers are increasingly expecting the BOJ to achieve its inflation target, with a growing majority forecasting authorities will end the negative rate regime by April, according to a Bloomberg survey.
