BoJ: No sense of optimism – Commerzbank

The fact that the Japanese Yen (JPY) only really started to appreciate at the end of the press conference, after the initial reaction to the interest rate hike was rather subdued. But when the appreciation did start, it was quite pronounced. It is clear that the Bank of Japan (BoJ) has made a policy decision to support the currency, notes Volkmar Baur, FX strategist at Commerzbank.

Intervention or non-intervention

“First, we won’t know for a while whether the BoJ intervened on behalf of the MOF at that exact moment. But it certainly looks like it did. This makes the BoJ the only central bank that has to intervene within hours of an interest rate hike in order for the currency to react as it ‘should’. By intervening, the BoJ is betting that inflation will remain high and the economy robust. If this is not the case, the JPY could go in the other direction again.”

“Second, at least one of Governor Ueda’s responses during the press conference was surprising. When asked why rates were being raised now and not later, given the weak economy and falling inflation, he said that raising rates would only slow the economy a little. But shouldn’t the economy be supported in such an environment?”

“And thirdly, there is still talk of the positive feedback loop between rising wages and rising domestic inflationary pressures. But within the data, real wages continue to fall because inflation is higher than wage growth, which is also burdened by higher social security contributions. So there is no sense of optimism, higher consumption and the resulting demand-pull inflation.”