Yen Rallies As BOJ’s Ueda Fuels January Rate Hike Speculation

The yen surged as Bank of Japan Governor Kazuo Ueda joined his deputy in strengthening market expectations for a potential interest-rate hike next week, signaling the central bank is doing its utmost to avoid a global market crash that followed July's hike.

The Japanese currency strengthened as much as 0.8% to a one-week high of 156.71 against the dollar following Ueda's remarks at an event hosted by the Regional Banks Association of Japan Wednesday. The governor also indicated rising confidence over wage increases after hearing encouraging views at various new year events and at the BOJ's recent branch managers' meeting. 

His remarks suggest the BOJ's two top officials are on the same page, as Deputy Governor Ryozo Himino said Tuesday the policy board will decide whether to raise rates, signaling the possibility of a hike. 

“Ueda's comments are broadly similar to Himino's but given he's the governor the weight of his words are different,” said Takeshi Ishida, a currency strategist at Kansai Mirai Bank. “The market interpreted it as an increasing possibility of a January rate hike.”

Ueda's comments prompted Nomura to shift its call for a hike next week from its previous forecast for March. Overnight index swaps show a 72% chance of a quarter-point rate increase at the BOJ's Jan. 23-24 meeting, up from 61% on Tuesday.

Following the BOJ's hike in July, global markets tanked, with the Nikkei 225 Stock Average falling by the most on record. Since then, the central bank has faced criticism about its communications, with Ueda being brought into parliament for questioning.

“It is not desirable for the conduct of monetary policy to intentionally cause surprises,” Himino said Tuesday. “The effectiveness of monetary policy depends significantly on how widely and accurately the central bank's intentions are understood.”

At the upcoming meeting, the BOJ will also release its updated economic outlook report, where officials are likely to discuss raising their inflation projections, according to people familiar with the matter. 

The BOJ released its regional economic report following its branch managers' meeting earlier this month, indicating some progress in pay gains. Businesses are increasingly aware of the need for sustained wage growth, the report noted.

Wage negotiations have started on a relatively positive note, with some companies, including retail giant Aeon Co. and insurer Nippon Life Insurance, reportedly planning to raise salaries for certain employees by at least 6%. After the December policy meeting, Ueda said that he wanted to see additional information on wage trends.

Himino said that US President-elect Donald Trump's inauguration speech on Tuesday may give a clearer idea of the direction of US economic policy. 

“The BOJ meeting next week is live with the US economy and spring wage negotiations key determinants,” said Rodrigo Catril, senior foreign-exchange strategist at National Australia Bank in Sydney. “Assuming next Monday President Trump doesn't announce any tariffs on Japan, then a hike looks like a strong possibility.”