On October 20th, Bank of Japan Governor Kazuo Shibata stated that the Bank of Japan will "patiently" maintain ultra loose monetary policy and respond "flexibly" to economic, price, and financial development. He warned that there is a high level of uncertainty in the future.
He also stated that the Japanese economy is recovering moderately, and the impact of supply restrictions is gradually fading, offsetting the impact of global demand slowdown on exports.
He stated that as cost driven pressures dissipate, inflation may slow down, but thereafter, due to economic strength and changes in corporate wage setting behavior, inflation may accelerate again.
However, Kazuo Ueda stated that the Bank of Japan must closely monitor the development of finance and currency markets, as well as their impact on the Japanese economy, as the outlook is highly uncertain.
Continue to 'release pigeons'
The Bank of Japan has downplayed the possibility of gradually withdrawing from large-scale stimulus measures in the near future, stating that the recent cost driven price increases need to be transformed into demand driven inflation before the Bank of Japan will consider raising interest rates.
By patiently maintaining loose monetary policy, the Bank of Japan will seek to achieve a sustained and stable inflation target of 2% while also achieving wage increases, "said Kazuo Ueda
Previously, in September, Kazuo Sobata told business leaders in Osaka that the uncertainty of wages and inflation was high, and the goal of achieving a 2% inflation rate and wage growth had not yet "emerged". He reiterated that the central bank would patiently continue to implement loose monetary policy within the current yield curve control framework.
Core inflation slowing down
Data released today shows that Japan's national core consumer price index (CPI) rose 2.8% year-on-year in September, marking the first time since August 2022 that it has dropped below 3%, a slowdown from the 3.1% increase in August.
The Bank of Japan will review these indicators at a two-day policy meeting that ends on October 31st, at which time it will release new quarterly economic growth and price expectations.
Although inflation weakened in September, we believe that by the end of next year, inflation will only be lower than the Bank of Japan's 2% target, "said Marcel Thieliant, Asia Pacific head of Kaitou Macro
Previously, the market widely speculated that the Bank of Japan would soon end the control of negative short-term interest rates and yield curves (i.e., keep the yield target of 10-year treasury bond bonds near 0%) in response to the expanding inflationary pressure.
The widening interest rate gap with the United States has weakened the yen, pushed up Japanese import prices, and exacerbated inflation that has exceeded the central bank's 2% target since April 2022. All of this has intensified speculation that the Bank of Japan may soon withdraw from ultra-low interest rates.
However, this is still shrouded in uncertainty, with increasing signs indicating that the Bank of Japan may raise inflation expectations by the end of this month, but it is difficult to determine whether this will prompt the Bank of Japan to make policy adjustments in the short term.
The Japanese yen may experience a huge shock
Tsutomu Soma, a bond and foreign exchange trader at Monex, stated that market volatility may intensify before the Bank of Japan's policy meeting at the end of this month.
On September 22, the Bank of Japan announced that it would continue to implement the ultra loose monetary policy, maintain the short-term interest rate at the level of negative 0.1%, and maintain the long-term interest rate at about zero by purchasing long-term treasury bond. On September 26th, the Japanese yen exchange rate in the Tokyo foreign exchange market fell to 149.18 yen to the US dollar during the day, setting the lowest level since October 2022.
On October 3rd, the Japanese yen hit 150.16 against the US dollar, then suddenly surged to 147.43, sparking speculation about the government's support for the yen. Since then, the yen exchange rate has remained relatively stable, but last weekend, when tensions in the Middle East intensified, the butterfly spread began to rise.
Option traders are preparing for the turbulence in yen trading. As people become increasingly concerned that the Japanese authorities will intervene to support the weakening yen, exchange rate fluctuations may intensify.
The one month USD/JPY butterfly option position hit its highest level since March on Wednesday. The butterfly option position reflects investors' views on the possibility of significant fluctuations in the currency during this period. This reflects the market's view that after maintaining a narrow range in the past few weeks, the yen may enter a period of turbulence.