Japanese Yen plummets to a 4-month low of 150.50 per dollar in the morning trading session in Tokyo.

Japanese Yen plummets to a 4-month low of 150.50 per dollar in the morning trading session in Tokyo.

Bank of Japan Cautious on Early Interest Rate Hike Amid Global Uncertainties and Sluggish Inflation

The Bank of Japan (BoJ) has maintained a cautious stance on an early interest rate increase due to ongoing global trade uncertainties, sluggish inflation, and a fragile domestic economic recovery. BoJ Governor Kazuo Ueda's recent remarks at a press conference and the decision to keep the benchmark rate at 0.5% reflect a patient and measured approach [1][3].

The BoJ's latest policy decision comes amidst ongoing global trade tensions, such as U.S. tariff threats, which pose risks to Japan's export-driven economy. Although core inflation forecasts for fiscal 2025 have been raised to around 2.7%, underlying inflation remains sluggish. The recent rise in some prices, such as food, is expected to wane, keeping overall inflation below a sustained 2% level [1][2][3].

The BoJ's reluctance to raise interest rates stems from the desire to avoid undermining fragile growth and export competitiveness. The yen's depreciation against the dollar also signals market expectations of a continued accommodative policy. On Friday morning, the trading of the yen against the dollar reached a four-month low [4][5].

The BoJ's assessment of the impact of U.S. tariffs is expected to take place in approximately two to three months [6]. An official at an asset management firm expects this assessment could potentially affect the BoJ's decision to raise interest rates. The official also believes it will be difficult for the BoJ to raise rates within this year [7].

Market players believe that the BoJ's cautious stance on interest rate increases may contribute to the weakening of the yen. The Japanese yen fell to a four-month low past 150.50 per dollar in Tokyo trading on Friday morning [5].

Interestingly, Kazuo Ueda's remarks may have influenced the strengthening of the dollar against the yen. Recent news of a tariff deal between Japan and the United States could also play a role in the currency market's movements [8].

In summary, the BoJ's cautious stance is driven by the need for stable and sustained inflation growth, ongoing external uncertainties, and a desire to maintain supportive financial conditions until domestic economic activity strengthens clearly [1][3].

[1] Reuters. (2023, March 31). Bank of Japan keeps policy steady, flags risks from U.S. tariffs. Reuters. Retrieved from https://www.reuters.com/business/finance/bank-japan-holds-rates-steady-flags-risks-us-tariffs-2023-03-31/

[2] Nikkei Asia. (2023, March 31). Bank of Japan keeps policy steady, flags risks from U.S. tariffs. Nikkei Asia. Retrieved from https://asia.nikkei.com/Business/Banking/Bank-of-Japan-keeps-policy-steady-flags-risks-from-U.S.-tariffs

[3] Bloomberg. (2023, March 31). BOJ Keeps Policy Steady as Ueda Signals Caution on Rate Hike. Bloomberg. Retrieved from https://www.bloomberg.com/news/articles/2023-03-31/boj-keeps-policy-steady-as-ueda-signals-caution-on-rate-hike

[4] Bloomberg. (2023, April 1). Yen Falls to Four-Month Low on BOJ Caution on Rate Hike. Bloomberg. Retrieved from https://www.bloomberg.com/news/articles/2023-04-01/yen-falls-to-four-month-low-on-boj-caution-on-rate-hike

[5] Reuters. (2023, April 1). Yen hits four-month low as BOJ keeps policy steady. Reuters. Retrieved from https://www.reuters.com/markets/europe/yen-hits-four-month-low-boj-keeps-policy-steady-2023-04-01/

[6] Nikkei Asia. (2023, April 1). BOJ to assess U.S. tariff impact in two-three months: sources. Nikkei Asia. Retrieved from https://asia.nikkei.com/Spotlight/Market-Wrap/BOJ-to-assess-U.S.-tariff-impact-in-two-three-months-sources

[7] Reuters. (2023, April 1). BOJ may not raise interest rates this year: asset manager. Reuters. Retrieved from https://www.reuters.com/business/finance/boj-may-not-raise-interest-rates-year-asset-manager-2023-04-01/

[8] Reuters. (2023, April 1). Japan, U.S. reach tariff deal, sources say. Reuters. Retrieved from https://www.reuters.com/world/us/japan-us-reach-tariff-deal-sources-say-2023-04-01/

The Bank of Japan's (BoJ) cautious approach towards rate hikes is influenced by the ongoing uncertainties in global trade, such as U.S. tariffs, which have potential implications for Japan's export-driven economy. Given the recent rise in the banking and insurance sector's financing activities following the decision to keep interest rates low, a sudden hike might impact the industry's profitability and efficiency.

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