TOKYO: Nobody likes a back-seat driver. Bank of Japan (BoJ) Governor Kazuo Ueda now has two – and they want to move at different speeds.
Ueda last Friday raised interest rates for a second time in three months, giving Scott Bessent – the US Treasury chief who stepped in to bolster the yen – the acceleration of monetary tightening he’s been urging. But Japan’s Prime Minister Sanae Takaichi is focused on faster economic growth.
Her two BoJ appointees were the only ones to vote against Friday’s hike, a harbinger of what may come next year when she gets to replace the two most hawkish members of the current board.
At a turbulent time for global bond markets, with inflation and borrowing costs on the rise almost everywhere, keeping both camps happy will only get harder.
It’s not clear what level of rates would satisfy Bessent, whose priority is to shield US Treasuries from any ructions in Japan – or how that squares with domestic needs as seen by the prime minister.
Inflation may be trending above-target but consumer spending and broader economic growth have lagged.
“The balancing act for Ueda is extremely difficult. He is caught between pressures from Takaichi and Bessent,” said Atsushi Takeuchi, a former head of the BoJ’s foreign-exchange (forex) division.
“Japan has the weakest inflationary pressure compared with the United States and Europe. It’s a fact that if the BoJ races toward rate hikes with other central banks, the BoJ will lose.”
Rapid increases would also risk tipping Japan back toward the long economic stagnation it’s only recently emerged from, and raise awkward questions about the BoJ’s independence if it’s perceived to be following a US roadmap.
But going too slowly could undo the gains of a currency intervention into which Bessent put American money and prestige – and which succeeded in dragging the yen back from a four-decade low. And with the board changes looming, time may be running short to normalise policy.
At a press conference last Friday, Ueda said policy had entered a “new stage”, and declined to rule out another hike in October or a bigger-than-usual move at some point.
Those were hawkish comments, but markets weren’t convinced and the yen fell anyway, dropping 1.3% against the dollar by 7pm in Tokyo.
While Ueda said the BoJ doesn’t set rates in order to control the forex market, many investors see currency moves as a key driver of decisions.
The governor’s job is “about as hard as it gets”, said Shoki Omori, chief Japan fixed-income strategist at Deutsche Bank.
“No single pace will please investors, Washington and the government at once.”
Right now, there’s just about enough alignment to keep everyone on board.
Local media have portrayed Bessent’s remarks about the BoJ as an unusually direct form of pressure, and in the days leading up to Friday’s decision, the mood at the central bank seemed to be one of quiet defiance.
Behind closed doors, officials maintained they would make decisions based on inflation, the economy and financial conditions rather than comments from foreign or government officials, according to people familiar with the matter.
Still, Ueda is likely happy to have Bessent supporting the case for further rate hikes and keeping Takaichi at bay, while the premier has gone along without too much protest.
That’s likely the price she had to pay for Bessent’s help with the yen – and it also may leave Washington content before the Japanese leader’s potential meeting with President Donald Trump in New York next week.
That doesn’t mean she’s going to stay quiet. Takaichi has tweaked the country’s main debt metric in a way that gives her room to boost spending.
Faster growth accompanied by a bit of inflation helps that cause, while higher rates will drive up debt-servicing costs that are already projected to climb some 30% by 2029.
The two dissents last Friday by Takaichi-appointed BoJ officials raised the prospect of stiffer opposition to future hikes.
Nevertheless, the Bessent-backed currency intervention has likely made it harder for the government to oppose BoJ tightening, according to around 80% of economists in a Bloomberg survey.
Bessent’s public advocacy “has made the BoJ free from domestic political pressure, which is a big deal”, said Takahide Kiuchi, a former board member at the central bank and now executive economist at the Nomura Research Institute.
“Since the Takaichi administration started last year, it has faced quite blatant political interference.
“I think they have postponed rate hikes when there was strong opposition from the administration. This time they didn’t do so, thanks to the United States.” — Bloomberg
