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The Bank of Japan’s governor warned on Friday that global markets remained unstable as he reaffirmed his commitment to raising interest rates should the country’s inflation and economic growth remain on track.
Kazuo Ueda’s remarks came after nearly six weeks of extreme market volatility during which the yen weakened to a historic low of ¥161 a dollar before sharply reversing course and surging more than 10 per cent. The Japanese stock market climbed to an all-time high before enduring its biggest ever one-day crash.
The central bank in March ended its negative interest rate policy after decades of on-and-off deflation. Ueda told parliament that the recent volatility was primarily stoked by concerns around the US economy, rather than the BoJ’s rate increase in late July, but noted that “markets at home and abroad remain unstable, so we will monitor market developments with a very high sense of urgency”.
Despite this recent instability, Ueda told a specially-convened parliamentary hearing on Friday that there was “no change” to the central bank’s basic stance that it would adjust monetary policy if it were “convinced that economic and price developments were moving as forecast”.
Ueda’s comments, which pushed the yen about 0.5 per cent higher against the dollar during morning trading, came as he was cross-examined over the July rate decision, which critics said had been accompanied by confusing messages from the central bank.
The 0.15 percentage point increase took Japan’s short-term policy rate to 0.25 per cent, still extremely low by the standards of global central banks, but a significant step towards Ueda’s hoped-for “normalisation” after years of ultra-loose policy.
“Japan’s short-term rates are still very low. If the economy is in healthy condition, they will move up to levels we consider neutral,” said Ueda, who also acknowledged that there was still significant uncertainty about the ultimate level of Japanese interest rates.
Ueda defended the July rate increase, arguing that its purpose was to “reaffirm that the economy was generally moving in line with our economic and price outlook, particularly the outlook for inflation, which, in terms of underlying inflation, is expected to remain at a level consistent with the 2 per cent sustainable price stability target in the latter half of the outlook period”.
During the same Friday session, however, finance minister Shunichi Suzuki said the government had yet to officially declare the end of deflation. “We believe we have reached a point where conditions are no longer deflationary, but we cannot deny the possibility that the country could go back into deflation,” said Suzuki.
Although economists had forecast modest rate rises by the BoJ within 2024, the July move took many market participants by surprise. In the days that followed, the yen rose sharply against the dollar, triggering a huge unwinding of speculative short-yen positions known as the “carry trade”.
The instability spiralled amid concerns that the US economy was at risk of a recession. On Friday morning, Ueda and others faced two and a half hours of questioning from a panel of lower-house members. A similar session will take place on Friday afternoon in the upper house.