Japanese Yen weakens in response to Bank of Japan reducing growth projections
Tokyo's Banking Woes Amplified by Tariff Tensions
The Bank of Japan (BoJ) pulled back on economic growth and inflation predictions this week, all while dodging a rate hike against the backdrop of Washington's volatile tariff policies. Let's dive into how these duties are shaking things up in Japan.
Market's Twitchy Response
The yen dropped towards a two-week depressed level against the dollar, dipping as much as 0.6%, while benchmark 10-year Japanese government bond yields sank to a three-week low of 1.26%. The Nikkei share average extended gains, rising a whopping 1%.
Opinions from the Finance Gurus
KANAKO NAKAMURA, an economist at Daiwa Institute of Research, Tokyo, noted that the BoJ's downward revisions to the GDP outlooks for FY2025 and FY2026 were larger than expected. She attributes this to the elevated uncertainty surrounding Trump's bold trade policy, which jeopardizes exports and output activities.
However, if trade concessions come Trump's way, Nakamura suggests there's room for another rate hike during the October-December period of this year. She also highlights that wage growth in this year's labor negotiations is anticipated to surpass 5%, supporting the case for additional rate hikes.
Meanwhile, KATSUTOSHI INADOME, senior strategist at Sumitomo Mitsui Trust Asset Management, remarks that the market responded to the BoJ's pessimism about the global economy's impact on their rate hike intentions. He also suggests that the 10-year JGB yield slipped more than it should due to this dovish response.
BoJ's Stance
MASATO KOIKE, senior economist at Sompo Institute Plus, Tokyo, points out that the BoJ is maintaining a broad range of upside and downside risks to keep their options open. He also highlights that the central bank continues to show its fighting spirit by not altering its rate hike stance.
NORIHIRO YAMAGUCHI, economist at Oxford Economics, Tokyo, adds that given the high uncertainty surrounding tariff turbulence, it's no surprise that the BoJ kept the policy rate steady. Yanguchi expects the BOJ to delay raising rates this year and in 2026, before bumping the rate to 0.75% only in 2027.
Trade-related Dilemmas
This tense trade environment is putting the BoJ in a tough spot. TOHRU SASAKI, chief strategist at Fukuoka Financial Group, Tokyo, explains that the BoJ is pessimistic about economic growth and the inflation rate, which in turn drives a yen sell-off. Unless trade concerns ease, it's hard for the BOJ to raise policy rates and pursue normalization.
BART WAKABAYASHI, Tokyo branch manager at State Street, posits that everything's been diminished in terms of their forecasts due to U.S. policy uncertainties. People are hesitant to make decisions until a solid policy emerges.
In essence, U.S. tariffs are wreaking havoc on Japan's economy, compelling the BoJ to adopt a cautious stance, hold rates steady, and revise down economic forecasts. The uncertain trade environment could keep interest rates low for an extended period.
- Despite the downward revisions to GDP outlooks for FY2025 and FY2026 by the Bank of Japan (BoJ), KATSUTOSHI INADOME, senior strategist at Sumitomi Mitsui Trust Asset Management, believes that the market responded excessively to the BoJ's pessimism about the global economy, causing the 10-year JGB yield to slip more than it should.
- The uncertain trade environment could potentially impact the finance business, as TOHRU SASAKI, chief strategist at Fukuoka Financial Group, explains that trade concerns are making it difficult for the BoJ to raise policy rates and pursue normalization due to the pessimistic view on economic growth and inflation rates.
- In FY2027, NORIHIRO YAMAGUCHI, economist at Oxford Economics, predicts that the BoJ may raise the policy rate to 0.75%, provided that trade turbulence eases and clarity emerges in U.S. policies, allowing for decision-making in the business and finance industries.
- BART WAKABAYASHI, Tokyo branch manager at State Street, notes that the pessimistic trade-related policies are casting a shadow over various business sectors, causing people to be hesitant to make decisions until a more solid policy emerges, affecting financial yields and the overall industry landscape.
