Here’s why Bank of Japan warns of jittery markets ahead

BOJ’s warning: Bank of Japan (BoJ) Governor Kazuo Ueda expressed cautious optimism on Thursday regarding US economic outlook while noting ongoing instability in global markets. Ueda’s comments, delivered after Group of 20 (G20) finance leers' meeting, reflect a mixed perspective on wher economic risks to Japan are diminishing.

Ueda's assessment of US economy and markets has gained attention following his recent emphasis on uncertainties surrounding a potential "soft landing" in US and volatile market conditions. He pointed to se risks as factors necessitating a cautious approach to any furr interest rate hikes in Japan.

"Optimism regarding US economic outlook seems to be broening," Ueda said during a press conference. "However, we must evaluate wher this optimism is sustainable or temporary." He ded that BoJ would take time to carefully assess risks before deciding on next interest rate increase.

Ueda also acknowledged that market volatility remains high, suggesting central bank remains vigilant against possibility of renewed financial instability. He stressed that BoJ must look beyond exchange rate movements when considering inflation, focusing on underlying factors such as changes in perception of US economy. " recent decline in yen is partly driven by increased optimism about US economy," he noted.

BoJ is widely expected to keep its short-term interest rate stey at 0.25 per cent during its upcoming two-day policy meeting, while maintaining its inflation forecast of around 2 per cent through March 2027. central bank ended its negative interest rate policy in March and raised rates in July, citing progress towards achieving its 2 per cent inflation target.

Ueda reiterated that BoJ would continue to raise rates if economy aligns with forecasts, but stressed importance of monitoring global uncertainties, particularly US economic outlook, when determining timing of future hikes. A Reuters poll revealed a slim majority of economists believe BoJ will hold off on anor hike this year, though most expect one by March 2025.

Pressure on Yen

yen has remained under pressure due to receding expectations of aggressive rate cuts by US Federal Reserve, combined with prospect of prolonged low borrowing costs in Japan. After recovering from a 30-year low of nearly 162 yen to US dollar in early July, currency resumed its decline, reaching approximately 153 yen this week. This depreciation has sparked concerns among policymakers about rising import costs and potential impact on Japanese economy.

Japanese Finance Minister Katsunobu Kato, who also attended G20 meeting in Washington, issued a warning about currency speculation. "Volatility remains high in currency market," Kato said during a press briefing. "Authorities must remain alert to spillover effects of each G20 member's macroeconomic policies and excessive exchange rate volatility driven by speculation."

BoJ’s rate hike in July caused significant market disruption, particularly in unwinding of yen carry tres, which have long been a source of cheap global funding. International Monetary Fund (IMF) on Thursday urged BoJ to proceed with rate hikes grually, given potentially bro impacts on global markets.

(With Reuters inputs)