As pressure from the United States on the Bank of Japan to accelerate rate hikes intensifies, market pricing of a hike at the September meeting is advancing, making whether this will mark a turning point for the yen a key focus. Goto Yujiro (後藤祐二朗) of Nomura Securities explains monetary policy in Japan and the United States and the outlook ahead.
Against a backdrop of mounting pressure from the United States on the Bank of Japan to accelerate rate hikes, the market is increasingly pricing in a faster pace of tightening by the Bank. Some expect a rate hike at the September meeting to be almost certain, which could affect the yen.
As a turning point for the Bank of Japan's reflationary policy, Governor Ueda indicated that the Bank would discuss policy at each future meeting and respond flexibly. Given the uncertainty surrounding the outlook for the neutral rate, some in the market expect additional rate hikes roughly once every 3 months.
Statements by U.S. Treasury officials and comments following the G20 have raised the possibility that calls and pressure from the United States for rate hikes could reach the Bank of Japan. At the same time, Finance Minister Katayama (片山財務相) and Governor Ueda (植田総裁) are thought to have difficulty publicly acknowledging that such pressure exists. The balance between the Bank of Japan's policy direction and limiting yen depreciation will be a key focus going forward.
The yen's muted appreciation over the past year has been affected by concerns that the Bank of Japan is behind the curve, while inflation expectations and real interest rates have been key factors. Movements in USD/JPY and in the gap between short- and long-term interest rates could affect future policy decisions and the yen.