Bank of Japan Holds Rates Steady... Yen Hits Lowest in a Month

Held Steady for 3 Consecutive Times at 0.25% Annually

Yen-Dollar Exchange Rate Soars to 156 Yen

Ueda: "Will Monitor Future Wage Trends"

The Bank of Japan has decided to keep its benchmark interest rate unchanged. This marks the third consecutive time it has held rates steady.

The Bank of Japan Holds Rates Steady... Yen Hits Lowest in a Month. The Bank of Japan announced on the 19th that it would maintain its short-term policy interest rate, the benchmark rate, at the current annual rate of 0.25%. Eight out of nine policy board members voted in favor of holding the rate, while one advocated for an increase to 0.5% annually.

In March, the Bank of Japan raised the benchmark interest rate for the first time in 17 years, ending the 'negative interest rate' (annual -0.1%). In the July meeting, it increased the benchmark rate from an annual 0~0.1% to 0.25%. It then held the rate steady in September and October. NHK reported that the Bank of Japan seems to have postponed further rate hikes due to opinions that it should observe the wage increase movements in next year's spring labor-management negotiations and the policies of U.S. President-elect Donald Trump.

Following the decision to hold rates steady, the yen-dollar exchange rate rose to 155.44 yen per dollar by noon, indicating a weaker yen. It surpassed 155 yen for the first time in about a month. The expectation of a widening interest rate gap between the U.S. and Japan led to increased yen selling and dollar buying. Bloomberg reported that "the yen-dollar exchange rate surpassing 155 yen is significant," adding that "this level of exchange rate increases the possibility of verbal intervention by the Japanese government and pressures the Bank of Japan to raise rates." Charu Chanana, an investment strategist at Saxo Capital Markets, said, "The hawkish stance of the U.S. Federal Reserve and the Bank of Japan's decision to hold rates steady provide new 'carry trade' motivation for yen traders, increasing the pressure to sell yen."

Kazuo Ueda, Governor of the Bank of Japan, stated at a press conference, "If the economy and prices materialize as forecasted, we will adjust the policy rate," adding that "more information is needed regarding wage trends, such as the momentum of next year's spring labor-management negotiations, so we made a cautious judgment." As the market became more convinced that the Bank of Japan would also hold off on further rate hikes in January next year, the yen-dollar exchange rate soared to 156.62 yen by 4 p.m. after the press conference. According to Bloomberg, foreign exchange strategists predict that if the Bank of Japan decides to hold rates steady until after March next year, the yen is at risk of further weakening.

Han Kyung-jae, hankyung@hankyung.com