BOJ’s Ueda Flags Decision on Rate Hike Next Week, Boosting Yen

(Bloomberg) — Bank of Japan Governor Kazuo Ueda strengthened speculation of a looming policy move by flagging the decision on whether to raise interest rates at next week’s meeting in a comment that strengthened the yen.

The governor also said Wednesday he heard many encouraging views on pay during new year events at various industries, and at the BOJ’s recent branch managers’ meeting. The US economy and the momentum toward spring wage negotiations remain key points, he added, while giving a speech at an event hosted by the Regional Banks Association of Japan.

Following Ueda’s remarks, the yen strengthened as much as 0.4% to 157.34 against the dollar, after earlier hovering around the 158 level.

Ueda’s latest comments come as BOJ watchers seek clues about the possibility of a rate hike in the lead-up to the Jan. 23-24 policy meeting. Overnight index swaps show a 68% chance of a rate hike this month, with the odds increasing to 86% by March. The governor’s comments Wednesday were more specific about what may be discussed at the meeting compared to his views earlier this month.

Ueda’s remarks echo Deputy Governor Ryozo Himino’s comments on Tuesday, which also did not rule out the possibility of rate hike next week. The board will decide whether to raise borrowing costs based on the outlook to be compiled at the meeting, Himino said. 

“Ueda’s comments are broadly similar to Himino’s but given he’s the governor the weight of his words are different,” said Takeshi Ishida, a currency strategist at Kansai Mirai Bank. “The market interpreted it as an increasing possibility of a January rate hike.”

At the upcoming meeting, the bank will also release its updated economic outlook report, where officials are likely to discuss raising their inflation outlook, according to people familiar with the matter. 

The officials will probably talk about upgrading projections for an underlying price gauge for this fiscal year and next, reflecting a recent surge in the cost of rice and the weakening of the yen, the people said.

The BOJ released its regional economic report following its branch managers’ meeting earlier this month, indicating some progress in pay gains. Businesses are increasingly aware of the need for sustained wage growth, the report noted.

Wage negotiations have started on a relatively positive note, with some companies, including retail giant Aeon Co. and insurer Nippon Life Insurance, reportedly planning to raise salaries for certain employees by at least 6%. After the December policy meeting, Ueda said that he wanted to see additional information on wage trends.

–With assistance from Taiga Uranaka, Mia Glass, Hidenori Yamanaka and Toru Fujioka.

(Updates with more background, analyst comments.)

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