Straight-line big jump! Japan suddenly announces big news!

Yen crashes sharply.

On February 24 local time, the Japanese yen suddenly plummeted, with the USD/JPY exchange rate dropping over 1% at one point. According to the latest news, Japanese Prime Minister Sanae Takaichi conveyed concerns about further interest rate hikes to Bank of Japan Governor Kazuo Ueda. Investors are re-pricing expectations for the Bank of Japan’s future monetary policy path.

Due to rising inflation in Japan, which remains above the BOJ’s target, the market expects the BOJ to raise interest rates to 1% by the end of June this year. The market has priced in about a 70% chance of a rate hike before April. Ueda has also explicitly stated that if economic forecasts are met, the BOJ is prepared to continue raising rates.

Yen plunges sharply

On February 24, Japanese media “Mainichi Shimbun,” citing unnamed sources, reported that Prime Minister Sanae Takaichi expressed clear concerns about further rate hikes during a meeting with BOJ Governor Kazuo Ueda last week. This stance was notably more assertive than during their last meeting in November.

Following this news, the yen sharply depreciated, with the USD/JPY rate falling as much as 1.05%, significantly increasing downward pressure on the yen. This reflects a re-pricing of market expectations for BOJ rate hikes. Additionally, the yield on 2-year Japanese government bonds widened its decline.

Analysts note that such political attitude shifts often influence market expectations of central bank policies, especially when communication windows are limited and information asymmetry exists.

In response to concerns about political interference in monetary policy, BOJ Governor Kazuo Ueda addressed the issue. According to Bloomberg, Ueda stated that Sanae Takaichi did not make any specific demands regarding the interest rate trajectory during their meeting, leaving room for the BOJ’s independence.

Currently, the BOJ has not signaled its next move on interest rates, and Takaichi has not publicly commented on the meeting’s content.

For investors closely watching Japan’s monetary policy, Takaichi’s latest remarks add uncertainty to the BOJ’s next steps.

Former BOJ Policy Board member Makoto Sakurai recently said that if the yen begins to weaken again before the upcoming Japan-U.S. summit this month, the BOJ might raise rates as early as March.

Takaichi is expected to visit Washington around the BOJ’s March 18-19 policy meeting and meet with U.S. President Trump.

In an interview, Sakurai said Takaichi might seek BOJ assistance to curb yen depreciation, as the recent rate review in Washington to support the yen indicates a U.S. preference for a stronger yen against the dollar.

He added that if necessary, the BOJ could justify a rate hike in March by citing the expected significant wage increases in the upcoming spring labor negotiations.

Signals of rate hikes

The BOJ ended its decade-long large-scale stimulus in 2024 and has raised rates multiple times, including raising its short-term policy rate to 0.75% in December last year, the highest in 30 years.

With inflation exceeding the BOJ’s 2% target for nearly four years, Ueda previously stated that if economic forecasts are met, the BOJ is prepared to continue raising rates.

Most economists surveyed expect the BOJ to raise rates to 1% by the end of June this year, with about a 70% probability priced in for a rate hike before April.

Krishna Bhimavarapu of Dreyfus Investment Management noted in a report that Japan’s January inflation data may reinforce the BOJ’s view that core inflation is still rising. While inflation excluding fresh food and energy appears to be cooling, the 2.6% year-over-year increase remains well above the BOJ’s target. He added that the BOJ is increasingly likely to bring forward its next rate hike to April, with further hikes later this year also becoming more probable.

The next BOJ policy meeting is scheduled for March 18-19. Its Policy Board will also meet on April 27-28, when new quarterly growth and inflation forecasts will be released.

However, Takaichi is known for supporting stimulus policies, favoring economic growth, and being cautious about rate hikes. As early as 2024 (the year before she became Prime Minister), she even called BOJ rate hikes “foolish.”

Analysts suggest that given Japan’s current inflation situation, the BOJ is likely to pause rate hikes for now. Takaichi cannot expect the BOJ to “rescue” the situation, as intervention to prevent rate increases would be costly and could accelerate yen depreciation. Meanwhile, her fiscal measures are also likely to put downward pressure on the yen, making market confidence hard to rebuild.

(Source: Securities Times)