Ueda Kazuo downplays inflation risks, yen sees largest drop since April, returning to the 150 mark

The Bank of Japan maintained its interest rates on Thursday and raised its inflation expectations, but Governor Kazuo Ueda's remarks were seen by the market as not sufficiently hawkish, leading to a significant weakening of the yen. Investors' expectations for a recent rate hike by the Bank of Japan cooled, pushing the USD/JPY exchange rate above 150 at one point.

The yen initially strengthened after the central bank meeting, but Ueda stated that monetary policy would not be adjusted solely based on the upward revision of inflation expectations, and that the inflation revision was mainly driven by rising food prices. He also indicated that the yen's movement was in line with the central bank's expectations, which disappointed the market.

The yen then reversed its earlier gains, falling 0.4% to 150.04, marking a new low since April 2 when Trump announced "reciprocal tariffs." Analysts believe that the central bank's stance lacks sufficient hawkishness, weakening market expectations for another rate hike in the short term.

Ueda's Remarks Cool Rate Hike Expectations

According to a previous article by Wallstreetcn, Ueda emphasized in his post-meeting remarks that the central bank would not decide on policy direction solely based on the upward revision of consumer inflation expectations for this fiscal year. He pointed out that the inflation revision was mainly driven by rising food prices and stated that the yen's exchange rate movement was in line with the central bank's expectations.

Michael Brown, Senior Research Strategist at Pepperstone Group, stated: "The central bank governor's stance is not particularly hawkish, which may weaken market expectations for another rate hike in the short term. It seems the central bank lacks the willingness to take decisive action for a rate hike."

Overnight index swaps indicate a 66% probability of a rate hike within the year, up from 59% before the US-Japan trade agreement was reached. Nevertheless, the central bank's cautious remarks still left investors disappointed.

US-Japan Trade Agreement Fails to Boost Central Bank Confidence

According to CCTV News, Japan and the United States reached an agreement on tariffs, with the US imposing a 15% tariff on Japan. This agreement adds complexity to the central bank's policy-making, and Ueda stated that the trade agreement would make it easier for authorities to grasp the impact of tariffs in the coming months, but it is uncertain when these effects can be fully assessed.

He added that the agreement reduces uncertainty regarding the outlook, but uncertainty regarding overseas trade policies remains high. This indicates that the central bank maintains a cautious stance in the face of external shocks.

James Athey, Portfolio Manager at Marlborough Investment Management, commented: "This is exactly what we expected from the press conference led by Ueda. They seem driven by a historical fear of making hawkish mistakes."

Political Instability Intensifies Market Volatility

Domestic political instability in Japan has made market direction more complex. Prime Minister Shigeru Ishiba's ruling coalition faces uncertainty regarding its political future after losing its majority in the upper house. This has raised concerns about potential increases in government spending.

Political uncertainty has weakened the yen while pushing up ultra-long-term government bond yields. Anna Wu, a cross-asset investment strategist at VanEck Sydney, stated, "This rate maintenance is more about disaster control than directional decision-making, as the central bank is concerned about tariff risks and domestic political uncertainty."

According to strategist Mark Cudmore, the dollar against the yen has risen to its highest level since April 2 and still has room for further increases. The market will continue to focus on Japan's weak economy and deeply negative real yields, both of which will weigh on the yen, until tariffs are seen as harming U.S. growth and prompting the Federal Reserve to reconsider interest rate cuts