BOJ Rate Hike & Yen Outlook (with Paul Allen)

Asks why the BOJ chose now to hike, given inflation may have peaked.

Paul Allen

Sayuri Shirai

Inflation is already rising from January to April, and producer prices are picking up to 6% in May, so inflation will exceed 2% in H2. The BOJ needs to deal with speculative short-selling and yen depreciation pressures.

The impact of oil price pickup is not very strong yet, but the trend is clear.

Asks how the governor's absence changes the meeting dynamic.

Paul Allen

Sayuri Shirai

The rate hike decision itself is unaffected, but the press conference is key. Markets are used to Governor Ueda's ambiguous style; Deputy Governor Uchida is unknown, creating uncertainty. He will likely try to show a hawkish message to counter speculative pressure.

It took a while for markets to understand Governor Ueda's communication style.

Asks about the themes expected from the deputy governor's press conference.

Paul Allen

Sayuri Shirai

Governor Ueda's June speech was surprisingly hawkish, acknowledging the 'behind the curve' risk. He suggested that if the BOJ is slow to react, they may have to raise rates significantly later, damaging the economy and financial system. Uchida will likely follow this message.

Ueda's speech was a surprise to me.

Asks about the impact of the Iran peace deal and reopening of the Strait of Hormuz on Japanese inflation.

Paul Allen

Sayuri Shirai

Oil prices are likely to stay above $60, so inflation will still rise. The bigger concern is the exchange rate; if the BOJ's message is seen as dovish, it could add to yen depreciation. Stopping yen depreciation beyond 162-163 is the most important thing to control imported inflation.

160 yen against USD was a psychological threshold, leading to intervention at 161.

Asks for a yen target.

Paul Allen

Sayuri Shirai

Difficult to target, but 160 was a threshold. If the BOJ cannot convince markets, the yen could test 162-163, and some estimate it could move to 170 or more. The BOJ and Ministry of Finance must work together to stop further depreciation.

The yen is stuck around 160, which is very challenging.

Asks how the yen can be defended against the carry trade, even with a 1% rate and occasional intervention.

Paul Allen

Sayuri Shirai

This is the biggest challenge for the BOJ. The Japanese economy is not strong; GDP grew only 0.8% for the financial year, and capital spending is nearly zero. Raising rates will increase mortgage payments for 70% of Japanese with floating-rate mortgages, damaging consumers. The key is whether they can stop yen depreciation.

Domestic demand is very weak.

Asks if excessive BOJ tightening could damage wage growth momentum.

Paul Allen

Sayuri Shirai

Corporate sector is worried about rising oil prices and supply chains. It's not easy for them to continue raising wages. People do not feel wages are picking up.

Nominal wages were high, but that was based on previous year's inflation.

Asks about the future of quantitative tightening and the argument for a pause.

Paul Allen

Sayuri Shirai

The BOJ will likely slow the pace of QT due to volatility and speculative activities in the JGB market. They will maintain the current schedule until March 2027, but from April 2027 they will likely stop tapering, keeping JGB holdings substantial.

There is a problem with functionality of the JGB market and short-selling by some investors.

Asks if the 78% rally in the Nikkei is justified.

Paul Allen

Sayuri Shirai

Japanese are amazed by the stock rally. Japanese investors tend to buy US stocks, while foreigners are rushing to Japanese stocks and bonds. The AI/semiconductor story is part of it, but also the yen depreciation boosts exporters.

There is a contrast: Japanese people like US stocks, foreigners like Japanese stocks.

Interrupts to announce the BOJ decision: 25bp hike to 1%, 7-1 vote, pledging to keep raising rates.

Paul Allen

Asks Shirai for her reaction to the decision and what's next.

Paul Allen

Sayuri Shirai

Everything was as expected, no surprise. The key is what Deputy Governor Uchida says at the press conference. He will likely mention possible rate hikes if inflation picks up. QT will continue as scheduled until March next year, then stop tapering from April. All expected.

We don't really see an impact on dollar-yen yet.

Asks if she agrees with the dissenting board member who sees downside risks to employment as greater than upside risks to prices.

Paul Allen

Sayuri Shirai

At this moment, the BOJ's expectation for economic growth is around 0.5%, which is likely. The most important thing is what happens to inflation, which is expected to exceed 2% from H2. If the BOJ cannot stop yen depreciation, that will add to additional inflation. That is the biggest concern.

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