Former Bank of Japan Governor: Trump's victory may exacerbate yen depreciation, forcing the central bank to raise interest rates earlier

According to the Zhitong Finance APP, Kazuo Momma, a former director of the Bank of Japan, pointed out that Donald Trump's victory in the U.S. presidential election has intensified the uncertainty faced by the Bank of Japan. If this trend continues, the yen may further depreciate due to Trump's election, which could prompt the Bank of Japan to raise interest rates earlier. In an interview on Thursday, Momma elaborated on this viewpoint and discussed the yen exchange rate, the timing of interest rate hikes, and the impact of Japan's political climate on central bank decisions.

Momma stated that Trump's victory not only increases uncertainty for the Bank of Japan but also exacerbates global uncertainty. He emphasized that a rapid depreciation of the yen could be the only reason for the Bank of Japan to raise interest rates ahead of schedule.

With the news of Trump's victory, the yen fell sharply against the dollar, dropping to around 154.40 by Thursday noon. Momma believes that an exchange rate of 160 yen to 1 dollar could be a critical threshold for policymakers, but the specific timing of interest rate hikes needs to consider public concerns about rising import costs and increasing inflation.

Additionally, Momma noted that given the Bank of Japan's plan to raise the benchmark interest rate to around 1% by the end of the fiscal year ending March 2026, a rate hike in January seems logical, and the rate hike cycle could occur every six months.

However, he also acknowledged that the current uncertainty is extremely high, so the timing of the rate hike may be delayed. The Bank of Japan will hold a policy meeting in mid-December and is expected to make a decision on the 19th. More than half of the observers of the Bank of Japan expect a rate hike next month, while 87% anticipate action in January next year.

At the same time, Momma mentioned that Japan's political climate could also have a decisive impact on the timing of interest rate hikes. Some leaders have expressed reluctance to see the central bank raise rates prematurely.

For example, potential ally of Shigeru Ishiba, Yuichiro Tamaki, stated last week that interest rates should not be raised before March. Ishiba himself had also indicated a month after taking office that the economy was not ready for a rate hike. Momma believes that under these circumstances, the Bank of Japan does not need to rush to raise rates.

In the decision-making process, the Bank of Japan will comprehensively consider factors such as the yen exchange rate, the U.S. economy, and Japanese politics. Momma also emphasized the importance of communication to avoid a repeat of the market turmoil that occurred after the rate hike on July 31. He stated that if the central bank decides to take action in December, they will send signals in advance.

In summary, Trump's victory in the U.S. presidential election has had a profound impact on the Bank of Japan, intensifying the uncertainty it faces. The depreciation of the yen may become a key factor prompting the central bank to raise interest rates earlier, but the specific timing of the rate hike needs to consider multiple factors, including public concerns, the political climate, and communication between the central bank and the market