"High City Trading" ignites the market, Kazuo Ueda maintains his stance: as long as inflation meets the target, interest rate hikes will continue

Bank of Japan Governor Kazuo Ueda stated on Wednesday that despite significant market fluctuations due to speculation about an early election, the central bank will continue to raise interest rates when conditions allow, and the monetary policy path has not changed.

"If our outlook is realized, we will continue to raise interest rates and adjust the degree of monetary easing based on improvements in the economy and inflation," Ueda said at a New Year meeting hosted by the Japan Regional Banks Association in Tokyo. This was his first public statement following the rise in speculation about Prime Minister Sanae Takaichi's early election.

Ueda's remarks were highly consistent with his statements from last week, indicating that the central bank has not been swayed by fluctuations in the financial markets. The current market is experiencing "Takaichi trading," with the Nikkei 225 index rising over 1% on Wednesday, briefly surpassing 54,000 points, while the yen fell below the 159 mark against the dollar, reaching its weakest level since July 2024.

Most economists expect the Bank of Japan to remain on hold at its policy meeting on January 23, with many predicting the next rate hike may not come until around June. The depreciation of the yen has increased import costs, which may complicate Ueda's goal of achieving stable price growth.

Central Bank Sticks to Rate Hike Stance

Ueda's statement on Wednesday clearly conveyed the Bank of Japan's policy intentions. He emphasized, "Wages and inflation may continue to rise gradually," and noted that "a moderate adjustment of monetary easing will help us smoothly achieve our price targets and promote long-term economic growth."

The Bank of Japan raised its benchmark interest rate to 0.75% last month, the highest level since 1995. Although most observers expect rate hikes to occur approximately every six months, some analysts believe the weak yen may prompt the central bank to act sooner.

Ueda stated that Japan's economy is expected to continue a moderate recovery in 2025. Sustained inflationary pressures, with key price indicators in Japan remaining at or above the central bank's 2% target for over three and a half years, provide support for further rate hikes.

Election Expectations Trigger Market Volatility

Sanae Takaichi is expected to dissolve the House of Representatives next week, paving the way for an early election. This will be her first nationwide election since taking office as Prime Minister in October of last year.

The market anticipates that Takaichi may use this opportunity to push for more expansionary fiscal measures, leading investors to bet that a victory for the Liberal Democratic Party will clear the way for large-scale fiscal stimulus. This week, the Japanese stock market soared, while government bonds and the yen weakened, with "Takaichi trading" sweeping across Japanese assets.

The yen has depreciated to its weakest level since July 2024, when Japanese financial authorities conducted currency interventions to support the yen. On Wednesday afternoon Tokyo time, the yen was trading around 159.20 against the dollar.

Inflation Pressures Intensify Policy Challenges

The depreciation of the yen will increase import costs, exacerbating inflationary pressures. This dynamic may complicate Ueda's goal of achieving stable price growth.

Japan's key price indicators have remained at or above the central bank's 2% target level for three and a half consecutive years, indicating persistent inflationary pressures. In this context, further weakening of the yen may force the central bank to reassess the timing of interest rate hikes Despite facing market volatility and political uncertainty, the statements from Kazuo Ueda indicate that the Bank of Japan remains committed to gradually exiting its ultra-loose monetary policy to achieve sustainable price stability and economic growth.

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