The yen rises above 158! Bank of Japan Governor Kazuo Ueda: If the economy continues to raise interest rates as expected, bond operations will be flexibly carried out under special circumstances

# Source: Wall Street Insights

## By Zhao Ying

Kazuo Ueda stated that the central bank is monitoring price movements in April, but this is only one factor in determining policy. He also mentioned that long-term interest rates are rising quite rapidly, and the Bank of Japan (BOJ) will conduct bond operations flexibly under special circumstances, possibly taking actions to encourage the formation of stable yields.

The Bank of Japan kept its policy rate unchanged at 0.75% on Friday, but raised its medium- and long-term inflation forecasts. Governor Kazuo Ueda made it clear that if economic conditions evolve as expected, the central bank will continue to raise interest rates, leaving room for further policy tightening.

At the subsequent press conference, Kazuo Ueda emphasized that underlying inflation will continue to rise moderately, and financial conditions remain accommodative following the December rate hike. Meanwhile, commenting on the recent rapid rise in long-term interest rates, he noted that the BOJ will conduct bond operations flexibly under special circumstances and may take measures to encourage the formation of stable yields.

During the press conference, the Japanese yen weakened continuously, with the USD/JPY exchange rate breaking above the 159 mark for the first time since January 14, reflecting the market's cautious stance on the interest rate hike path. However, the USD/JPY pair later fell by about 70 points intraday, dropping below 158, and was last traded at 158.12.

This rate decision was in line with market expectations. However, two policy board members, Soichi Takada and Naoki Tamura, proposed revising the wording of the outlook report, which was rejected in a vote, indicating divisions within the central bank regarding policy statements.

### Clear Hiking Stance but Cautious Pace

Elaborating on the future policy path, Kazuo Ueda said that if economic conditions develop as expected, the BOJ will continue to raise interest rates. He pointed out that it will take a considerable period of time for the impact of rate hikes to fully spread to the real economy and prices, and the central bank will closely examine the various effects of previous rate hikes on corporate and household activities, as well as the overall economy and prices.

Regarding potential timing for future rate hikes, Kazuo Ueda disclosed that the central bank is monitoring price changes in April, but stressed that this is only one factor in policy decisions. He stated that the BOJ will assess the impact of each rate hike on the economy and prices, which will determine the pace of tightening, adding that "it is not necessary to wait for the final data on the impact of the December rate hike before taking action". He also pledged to implement appropriate monetary policy to avoid falling behind the curve.

### Pledging Flexible Intervention in the Bond Market

Faced with the rapid rise in long-term interest rates, Kazuo Ueda sent a clear signal of intervention. He noted that long-term interest rates are rising quite rapidly, and the BOJ will conduct bond operations flexibly under special circumstances, possibly taking actions to encourage the formation of stable yields.

Kazuo Ueda specifically mentioned that the supply and demand dynamics of ultra-long-term Japanese government bonds have been volatile due to fiscal year-end factors. He added that while some attribute the recent yield movements to fiscal concerns, he refrained from commenting on the day's yield fluctuations.

On the neutral interest rate level, a key focus of the market, Kazuo Ueda said it is difficult to quantify, noting that "it is hard to precisely define the so-called 'neutral interest rate' level"—the rate at which monetary policy neither stimulates nor restrains economic growth.

### More Optimistic Inflation Assessment

The Bank of Japan raised its medium- and long-term inflation forecasts, indicating a more optimistic assessment of price pressures. Kazuo Ueda stated that the overall inflation rate is very likely to fall below the 2% target, but emphasized that inflation should not be expected to significantly exceed the latest projections.

He pointed out that as underlying inflation approaches 2%, it is necessary to pay attention to even minor foreign exchange fluctuations. The BOJ will place greater emphasis on core inflation when making policy decisions. Kazuo Ueda also said that it is not yet the stage to consider whether the target will be achieved ahead of schedule, though board member Soichi Takada believes the target has already been met, reflecting divergent views within the central bank on the inflation outlook.

Kazuo Ueda noted that the latest outlook reflects the assessment that the economic measures approved by parliament last month will boost both economic growth and prices.

### Other Policy Remarks

On the yen's exchange rate, Kazuo Ueda declined to comment specifically on foreign exchange levels, only stating that exchange rates are determined by multiple factors, not just interest rate differentials. He pointed out that a weaker yen may push up import costs, which could be passed on to domestic prices. Kazuo Ueda pledged to cooperate with the government to fully communicate the BOJ's stance on interest rate hikes.

Regarding the consumption tax cut proposed by the Takaichi administration, Kazuo Ueda said this is a matter for the government and parliament, and the reduction of the consumption tax on food has not yet been formally decided. He stressed that it is crucial for the government to win market confidence by committing to fiscal soundness, and the assumption of a consumption tax cut was not included in today's policy outlook.

### Risk Warning and Disclaimer

The market is risky, and investment requires caution. This document does not constitute personal investment advice, nor does it take into account the specific investment objectives, financial situations, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this document are in line with their specific circumstances. Investment decisions made based on this document shall be at the user's own risk.

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