Ueda Kazuo's dovish remarks trigger yen sell-off! The suspense of the Bank of Japan's interest rate hike in October remains

According to the Zhitong Finance APP, Bank of Japan Governor Kazuo Ueda stated on Friday that the central bank will closely monitor whether U.S. tariffs and ongoing uncertainties in the overseas economy may suppress companies' willingness to raise wages. He reiterated that if economic and price trends align with expectations, the central bank will continue to raise the currently low interest rates.

However, he also pointed out that the outlook for the Japanese economy faces many uncertainties, including increasing signs of weakness in the U.S. labor market and the potential impact of U.S. tariffs on Japanese corporate profits.

In a speech to business leaders in Osaka, Ueda said, "If uncertainties regarding the overseas economy and trade policies remain high, companies may focus more on cost-cutting, weakening their efforts to pass on price increases to wages."

"The future trajectory of the U.S. economy and its monetary policy operations may have a significant impact on the Japanese economy and prices," Ueda added, "We will continue to keep a close watch."

Ueda maintained policy flexibility by reaffirming the central bank's consistent interest rate stance, without signaling a clear intention to raise rates at the policy meeting later this month. He stated, "If the currently set economic and price baseline scenario is realized, the central bank will continue to raise the policy interest rate based on improvements in the economy and prices."

Recently, market expectations for interest rate hikes have increased, but Ueda did not forecast any policy changes. At last month's policy meeting, two committee members voted against maintaining the status quo, and this week, a dovish committee member emphasized the necessity of policy adjustments in a speech.

Ueda adopted a more neutral strategy, focusing on monitoring factors that officials should consider when assessing the timing of interest rate hikes. He listed factors to watch, including global (especially U.S.) economic conditions and the impact of U.S. tariffs on Japanese corporate profits, and emphasized the need to be cautious of wage and price trends that include food inflation.

After Ueda's speech, the yen fell 0.3% against the dollar to 147.68.

Aozora Bank Chief Market Strategist Akira Sugiyama stated, "Ueda's dovish remarks triggered a sell-off of the yen. The market had originally expected a more hawkish signal, but the governor avoided showing an aggressive stance on interest rate hikes."

Although Ueda did not support or refute the idea of raising rates, his reaffirmation of the current stance kept market expectations for a rate hike at the October 30 policy meeting active. Overnight swap market pricing shows that traders believe the probability of a rate hike at this meeting is about 60%, a significant increase from 22% at the beginning of last month.

The annual Osaka meeting has traditionally been an occasion for the Bank of Japan governor to deliver important annual speeches. This speech was held a few days after the central bank released its latest short-term economic outlook survey, marking the first time since 2013 that an important speech was scheduled after a quarterly survey, intensifying market speculation that the central bank might use important data to pave the way for a rate hike.

Bank of Japan Deputy Governor Shinichi Uchida stated on Wednesday that the short-term outlook shows that corporate confidence remains at a good level, suggesting that the economy aligns with the central bank's outlook—an important prerequisite for raising rates.

Japan's inflation rate has remained above the central bank's 2% target for over three years, and Ueda has adopted a gradual rate hike strategy, citing that the basic inflation trend has not yet met the target.

At the September policy meeting, committee members Naoki Tamura and Hajime Takata both advocated for a rate hike, marking the first record of multiple committee members voting against maintaining rates during Ueda's tenure. Although Ueda did not list political uncertainty as a monitoring factor, he is closely watching the results of the ruling Liberal Democratic Party's election for a new president on Saturday A survey by Kyodo News shows that the leading candidate for the party presidency, Takashima Sawa (an advocate of monetary easing), opposes interest rate hikes, while the other four candidates believe that monetary policy should be decided independently by the central bank