Analysis:BOJ's communication about-face may haunt future rate moves

FILE PHOTO: Japanese national flag is hoisted atop the headquarters of Bank of Japan in Tokyo, Japan September 20, 2023. REUTERS/Issei Kato/File PhotoTOKYO : The Bank of Japan managed to calm investor nerves during global market turmoil this week by reversing a calibrated strategy to communicate steady interest-rate rises, but the flip-flop tests the bank's resolve to phase out decades of radical stimulus.

"The BOJ hiked interest rates because it didn't like the weak yen. Now it appears to be suggesting a pause in rate hikes because it doesn't like stocks falling," said Takuya Kanda, an analyst at Gaitame.com Research Institute."If the BOJ is watching markets so much in setting policy, there's a chance it won't be able to raise rates that much."

While steadying markets, Uchida's about-face"also ended up magnifying market swings", said Kazutaka Maeda, an economist at Meiji Yasuda Research Institute."It's undesirable for BOJ communication to cause so much volatility."Now, said economist Yoshimasa Maruyama at SMBC Nikko Securities,"the chance of a near-term rate hike is gone. In fact, the chance of another hike this year has diminished significantly.

In a rare public chiding, ruling Liberal Democratic Party executive and former finance ministry official Satsuki Katayama urged the BOJ on Wednesday to communicate better with markets, saying the LDP will likely discuss whether the July hike was a mistake.It raised rates from zero in August 2000, ending a then-novel experiment despite government objections. Ueda, then a policy board member, voted against ending zero rates.

Politicians, who had long pressured the BOJ to ease policy to weaken a soaring yen to help exporters, have switched in the past two years as the currency's falls 38-year lows threatened to push inflation above the bank's 2 per cent target.

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