Yen Drops, Nikkei Skyrockets Following BOJ's Uchida's Announcement: "No Rate Increases During Market Instability"

BOJ's Controversial Rate Hike Decision

It's only been a few days since the Bank of Japan (BOJ) made the controversial decision to increase rates by 25bps in an economy that's slowing and deflating. This decision, made for political reasons, was widely criticized as a foolish move. We predicted that this decision would be reversed shortly.

Market Crash Predicted and Realized

As anticipated, the Japanese stock markets crashed following the weekend. This wasn't just any crash, but the largest point crash in the history of Nikkei and Topix, even surpassing Black Monday. This crash ensured that any political considerations that influenced the BOJ's decision to raise the yen to control inflation - which also resulted in a 20% stock market crash in three days - would be quickly overruled.

BOJ's Inevitable Capitulation

We predicted that the BOJ would have no choice but to capitulate. This prediction was confirmed less than a day later when BOJ Deputy Governor Shinichi Uchida, in response to the ongoing market collapse, pledged not to increase interest rates during periods of market instability.

Uchida's Dovish Signal

Uchida tried to maintain a brave face, but the market interpreted his words as an end to rate hikes after last week's small 10-25bps rate increase triggered a global deflationary tsunami and crashed Japan's market. Uchida stated that the bank must maintain monetary easing with the current policy interest rate for now, given the extreme volatility in financial and capital markets both domestically and internationally.

Future Rate Policy Decisions

Uchida suggested that the bank will consider the state of financial markets in future decisions on rate policy and will refrain from any more rate hikes when markets are unstable. He stated that unlike the process of policy interest rate hikes in Europe and the United States, Japan’s economy is not in a situation where the bank may fall behind the curve if it does not raise the policy interest rate at a certain pace.

Market Reaction

Following Uchida's comments, the yen immediately fell by more than 2% against the dollar, and Japanese stocks soared. These were the first public remarks by a BOJ board member since the bank hiked interest rates on July 31, and also the first remarks to admit that last week's rate hike had been a catastrophic policy error.

Analysts' Reactions

Analysts, especially those who were predicting a 130 USDJPY in the near future, were quick to react to the realization that the BOJ had capitulated. According to Credit Agricole CIB, Uchida's comment confirms that the BOJ will likely be hesitant about hiking rates again soon, which will weigh on the yen. The Bank of Singapore also commented, stating that "the outsized yen rally is making policymakers uncomfortable".

BOJ's Future Challenges

Unfortunately for the BOJ, by admitting defeat it has dug its own grave for the last time. Having capitulated on further tightening just because of a modest bear market in stocks, the full court press to short the yen is now back on and we expect it won't stop until the currency hits new record lows in the very near future, with the BOJ now completely powerless to do anything as Japan's hyperinflation finally kicks in.

Bottom Line

The BOJ's decision to increase rates in a slowing economy and its subsequent reversal following a market crash raises questions about the role of political considerations in economic policy decisions. What do you think about this? Do you believe the BOJ made the right decisions? Feel free to share this article with your friends and discuss it. Don't forget to sign up for the Daily Briefing, which is available every day at 6pm.