By Leika Kihara
TOKYO (Reuters) – 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.
If the central bank, scarred by missteps and reversals going back a quarter century, is at the mercy of markets, it may be constrained in moving away from what it has called excessive support for the world’s fourth-biggest economy.
The yen spiked and Tokyo shares plummeted last week as the BOJ unexpectedly raised its policy rate from essentially zero to the highest in 15 years and Governor Kazuo Ueda signalled further steady rate hikes, a path the central bank had been trying to suggest for months.
Ueda’s influential deputy helped stabilise sentiment on Wednesday by saying the BOJ would not raise rates when markets were unstable, but confusion resumed on Thursday, when a summary of the discussion at the bank’s July 30-31 meeting showed policymakers focussed on a series of rate hikes to keep inflation from overshooting.
“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.”
The Japanese currency skyrocketed on Monday and the plunged the most since 1987 after the BOJ raised its short-term policy target to 0.25% from a zero-to-0.1% range, followed by Ueda’s hawkish comments. Investors were also rattled by signs the Federal Reserve would soon cut rates to buoy a slowing U.S. economy.
BOJ Deputy Governor Shinichi Uchida said on Wednesday the rout was cause for pause, as it might affect the bank’s inflation projections and rate trajectory.
“As we’re seeing sharp volatility in domestic and overseas financial markets, it’s necessary to maintain current levels of monetary easing for the time being,” he said, adding that Japan could afford to wait on hikes as inflation remained moderate.
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.”
DEJA VU
Now, said economist Yoshimasa Maruyama at SMBC Nikko Securities, “the chance…
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