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The yen jumped to a three-month high against the dollar on Thursday after comments by Bank of Japan governor Kazuo Ueda convinced jittery markets that the country might have moved closer to ending its ultra-loose monetary policy.
Japan’s currency strengthened as much as 1.9 per cent against the dollar to trade as low as ¥144.55, its strongest level since late August. Yields on 10-year Japanese government bonds, which proceed inversely to prices, rose 0.1 percentage points to 0.75 per cent, their biggest one-day proceed since July.
Ueda met with Japanese Prime Minister Fumio Kishida on Thursday and told the country’s parliament that managing monetary policy “will become even more challenging from the year end and heading into next year”.
His comments fuelled speculation ahead of the BoJ monetary policy meeting on December 19. At its last meeting, the central bank held short-term interest rates at minus 0.1 per cent, maintaining its decades-long ultra-loose monetary policy.
JPMorgan FX strategist Benjamin Shatil said most investors in Tokyo would not have considered the upcoming December meeting to be “live” until Ueda’s comments. “One of the most popular trades among macro investors this year has been to position for higher Japanese rates — and these recent comments only add conviction to that view,” said Shatil.
Although Ueda’s comments were not overtly hawkish, they had a powerful effect on financial markets. “The market has a tendency to take any hint of normalisation as an indication that we might be at the beginning of a more rapid turnaround in policy,” said Jane Foley, head of FX strategy at Rabobank. “It will latch on to any minor hint.”
Investors revised their predictions for the likely timing of an end of Japan’s negative interest rate policy following Ueda’s remarks, bringing it forward to as early as January and forcing holders of short yen positions to wind back their exposure.
The yen’s rally was exaggerated by the fact that speculators were bearish on the currency, said ING FX strategist Francesco Pesole. This speculation pushed the currency to weaken past ¥151 in November, reaching a level at which traders anticipated intervention from the BoJ.
The yen had already been edging higher against the dollar in early trading on Thursday, ahead of Ueda’s comments, after BoJ deputy governor Ryozo Himino was seen to play down possible damage caused by hiking interest rates.
Some analysts said that the comments by Ueda and Himino were designed to prepare global markets for a gradual “normalisation” of monetary policy in Japan next year.
Still, some analysts warned that expectations of an interest rate hike as early as December or January might be premature.
“The market is perhaps more used to thinking about policy from the perspective of other G7 central banks but that logic does not — and will not — apply to the Bank of Japan,” said Foley. “The pace of normalisation is still likely to be very moderate, and I think that’s something that will be explained again on December 19.”
