New Japanese Prime Minister Shigeru Ishiba’s unexpected warning against raising interest rates is pushing back expectations of another central bank move this year and increasing doubts about his communications.
Ishiba triggered a sharp yen slide on Wednesday after he said Japan wasn’t ready for higher borrowing costs for the time being, in an unusually direct remark for a prime minister following his meeting with Bank of Japan Governor Kazuo Ueda.
A Bloomberg survey last month showed that 53% of economists forecast the BOJ to push up interest rates for the third time this year in December. But that outlook has now been thrown into doubt. Financial markets are also signalling reduced expectations of a rate hike this year.
“This is a surprise,” said Tsuyoshi Ueno, a senior economist at NLI Research Institute in Tokyo. “This has strengthened my view that there will be no rate hike in December.”
The BOJ holds its next policy meeting later this month and was already widely expected to hold rates given its recent cautious signals and the timing of a general election called by Ishiba.
Overnight-indexed swaps indicate that traders’ expectations of a near-term BOJ rate hike are retreating. The odds of a December rate increase fell to 22% from 29% on Friday when Ishiba won the ruling party’s leadership contest. The perceived probability for a rate hike in 12 months’ time declined to 78% from 87%.
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The comments from the new premier, a self-declared “defence nerd”, likely reflect his inexperience in communicating with markets. A sharp fall in Tokyo stocks at the start of this week following his victory in the ruling party leadership vote may have contributed to a desire to reassure investors.
“Ishiba may be trying to brush off an image of supporting rate hikes as some in the market view him that way,” Yusuke Matsuo, senior market economist at Mizuho Securities, wrote in a note Thursday.
The country’s chief spokesman Yoshimasa Hayashi told reporters Thursday morning that Ishiba believes the specifics of monetary policy should be left to the BOJ, and that the government is monitoring markets with a sense of urgency.
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Japan’s currency briefly reached 147.24 against the US dollar Thursday morning as investors factored in Ishiba’s comments and stronger-than-expected US jobs data. That’s already weaker than the level immediately before Ishiba’s unexpected victory over central bank easing advocate Sanae Takaichi in the ruling party’s leadership election Friday.
The nation’s leadership change has fuelled recent volatility in the market. When Ishiba won the leadership vote the currency strengthened by more than 3 yen against the US dollar as investors initially concluded that the new leader would be in favour of continued rate hikes by the central bank.
That jump in the yen prompted a 3.5% drop in Tokyo stocks on Monday. The swing back in the other direction for Japan’s currency is helping push equities up Thursday, but they have yet to regain Friday’s closing level. The heightened volatility gives the impression that markets are still highly skittish over the policy direction of the new leader.
“In a way, Ishiba is trying to show he is market friendly as he probably wants to do everything he can to raise the likelihood of a clear victory in the election,” Ueno said. “But it doesn’t mean Ishiba will always be putting pressure on the BOJ. I still expect the next hike to come in January.”
The election takes place on Oct 27. Approval ratings for Ishiba’s cabinet are among the lowest for a new Japanese leader in recent years, according to the latest newspaper surveys, indicating there’ll likely be no honeymoon period for the new administration.
A Nikkei poll published Wednesday showed 51% approval for Ishiba’s cabinet, compared with 59% for his predecessor Fumio Kishida and the lowest in comparable polls since 2002.
The ratings indicate voters still have doubts about the ruling Liberal Democratic Party’s moves to reform itself in the wake of scandals over party slush funds and its ties to a religious organisation, political analysts say.
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While the poll numbers are relatively low, they still mark a rebound from support levels around 20% for former Prime Minister Fumio Kishida’s cabinet during the final months of his administration.
Kishida himself buffeted markets when he became prime minister in 2021. Stocks plunged in response to his suggestion that he might raise the capital gains tax, a drop that was dubbed the “Kishida shock”.
During the LDP leadership campaign, Ishiba made a similar remark about raising the tax on gains on investment income but hasn’t indicated since then that he will pursue the idea.
“His comments during the election campaign and his views on the Bank of Japan have been inconsistent,” said Naoki Fujiwara, a senior fund manager at Shinkin Asset Management in Tokyo. “He doesn’t seem to have much knowledge of the economy, and he may be easily influenced by the opinions of those around him.”
