Rising Internal Disagreements: Dovish vs. Hawkish Views
The debate on the timing of interest rate hikes within the Bank of Japan is intensifying. Dovish board member Toyoaki Nakamura recently stated in Hiroshima that there is no need to raise rates in December. He emphasized that Japan's economy is still recovering and policy adjustments should be made with caution. "We must carefully adjust the degree of monetary easing by evaluating a range of data and considering the economic recovery." Nakamura has repeatedly opposed this year's two rate hikes and expressed differing views on yield curve control (YCC) adjustments.
In contrast to Nakamura's views, Bank of Japan Governor Kazuo Ueda's recent statements have been more hawkish. In an interview, he mentioned that the timing for rate hikes is "imminent," noting that economic data is moving in the expected direction. However, according to the Nihon Keizai Shimbun, the Japanese government is more inclined to delay the rate hike to January next year, which could further weaken market bets on a December hike.
Market Reaction: Yen Weakens, Rate Hike Expectations Lowered
Nakamura's dovish remarks immediately impacted the market. The yen weakened sharply after his speech, and traders reduced their bets on a Bank of Japan rate hike in December. According to the latest data, the probability of a December rate hike has dropped from 66% last week to 36%. Meanwhile, a Bloomberg survey shows that only about half of economists predict the Bank of Japan will raise rates this month, with 30% believing the hike will be postponed to January next year.
The weakening yen may put pressure on import prices but could also support Japanese export companies to some extent. However, a sharp 22% drop in small business profits highlights widespread economic pressure, exacerbating concerns about the sustainability of wage growth.
Economic Recovery and Inflation Target: Multiple Challenges Test Policy Choices
Japan's economy currently faces a series of complex challenges that require the central bank to balance multiple contradictions in its policy choices:
- Wages and Capital Spending
Nakamura takes a cautious stance on the sustainability of wage increases. He warns that from the 2025 fiscal year, the annual inflation rate may fall below 2%, which does not align with the central bank's target. Additionally, Japanese government data shows that the profitability of small businesses is declining, which may hinder the widespread dissemination of future wage increases. - Corporate Profits and Cost Transmission
Japanese corporate profits have declined for the first time in seven quarters as of September 30, with small businesses seeing a particularly significant drop. This indicates that the current economic recovery is not balanced, and companies face difficulties in passing on costs to consumers, further suppressing the impetus for inflation to rise. - Inflation and Exchange Rate Pressure
While yen depreciation may pose a risk of rising import prices, Nakamura emphasizes that rate hikes should not be made prematurely unless consumer prices rise significantly due to yen depreciation. This contrasts with Ueda's more proactive stance and reflects differing expectations within the central bank regarding the sustainability of inflation targets.
Policy Outlook: Cautious Adjustments Remain the Main Theme
Currently, the Bank of Japan faces a critical decision on whether to adjust policies to address economic and inflation targets. Nakamura's dovish views suggest that some board members prefer to wait for more data to ensure policy adjustments do not hinder the momentum of economic recovery. Although Ueda's hawkish remarks may drive short-term market fluctuations, internal disagreements and the government's stance on the timing of rate hikes will significantly impact policy direction.
In the future, whether the Bank of Japan decides to raise rates at the December meeting or delay it to next year will have broad implications for the yen's exchange rate, capital markets, and the global economy. The market needs to continue monitoring Japanese economic data and further statements from central bank officials to assess the policy path and potential impacts.
