The new Japanese Prime Minister just took office and turned dovish? He stated that it is not suitable to further raise interest rates now, causing the yen to fall by nearly 2% at one point

Newly appointed officials are eager to make their mark. The first fire lit by Japan's newly appointed Prime Minister Fumio Kishida is a possible shift in stance, departing from his previous image as a hawkish supporter of rate hikes.

On Wednesday, October 2nd local time, Kishida, on his second day as Prime Minister and the first day of his new cabinet, stated that the current environment in Japan is not conducive to further rate hikes, as the economy is not yet prepared for it. After meeting with Bank of Japan Governor Haruhiko Kuroda for the first time as Prime Minister, he said:

"I don't think we are in an environment that requires further rate hikes."

"I believe the current environment is not suitable for further rate hikes. I told the Governor that I hope the economy can move towards ending deflation in a sustainable manner against the backdrop of loose monetary policy."

Subsequent comments noted that this is Kishida's most explicit opposition to further rate hikes to date, clearly aiming to shed his hawkish monetary policy reputation. In August this year, he also told the media that gradually raising ultra-low rates would help improve Japan's profitability.

Kishida's remarks on Wednesday shook the yen exchange rate, with investors quickly reacting to the possibility of the new Japanese government putting the brakes on rate hikes.

Following Kishida's speech, the yen accelerated its decline on Wednesday, further widening its losses after the unexpected growth in the U.S. "small non-farm" - private sector ADP employment figures were announced. During the early trading session in the U.S. stock market, the dollar rose to 146.26 against the yen, hitting a high not seen since last Friday in September, approaching the high set on September 3rd, with losses expanding to about 1.9%, leading among G10 currencies.

Some commentators mentioned that before Kishida's speech, the Bank of Japan had sent signals on his first day in office on Tuesday, hinting that the new government is not in a hurry to raise rates. Cabinet ministers also downplayed Kishida's interest in normalizing monetary policy, emphasizing the need for the central bank to focus on the unfinished task of eliminating deflation.

Wall Street News noted that Ryo Akazawa, the Minister in charge of economic revitalization in Kishida's cabinet, stated on Wednesday that he hopes the Bank of Japan will take a cautious approach to further rate hikes. Akazawa said that the current policy rate of 0.25% in Japan is "abnormal by global standards," but Japan's top priority is to "get rid of deflation."

After meeting with Kishida on Wednesday, Kuroda stated that he informed Kishida that the Bank of Japan will carefully decide whether to raise rates further. "I told the Prime Minister that we are supporting the economy through a loose monetary environment," he continued, saying that if economic and price developments align with the central bank's forecasts, they will raise rates.

Lee Hardman, Senior FX Analyst at Mitsubishi UFJ Financial Group, commented that Kishida's attitude will encourage market participants to rebuild yen short positions, expecting the Bank of Japan to face greater political pressure to slow down the pace of rate hikes. Hardman also stated that the sharp appreciation of the yen and increased financial market instability this summer helped alleviate the upward risks of inflation in Japan.

In August this year, due to concerns about the slowdown in the US economy, market expectations for the Federal Reserve to ease monetary policy increased, while the Bank of Japan began to raise interest rates, narrowing the interest rate differential with the US, causing arbitrage trading to suffer heavy losses. Bets using the yen as a financing tool were therefore forced to close out.

Currently, most observers of the Bank of Japan expect that at the monetary policy meeting ending on the 31st of this month, the BOJ will keep the benchmark interest rate unchanged, with the next rate hike most likely to occur in December or January next year