Bank of Japan Deputy Governor Uchida discussed current inflation trends and economic outlook. He observed that medium- and long-term inflation expectations are on the rise but could temporarily slow before increasing again.
Uchida stated that consumer inflation has surpassed expectations, with a broader rise in food prices indicating a change in corporate pricing behaviour. He anticipated that core consumer inflation might dip below 2% in the next fiscal year, but is likely to gradually pick up speed thereafter.
Interest Rate Strategy
Uchida’s comments suggest a careful strategy, indicating no immediate plans to raise interest rates. Prospective rate increases are anticipated towards late 2025 or early 2026.
Based on the deputy governor’s remarks, we believe the Bank of Japan will maintain its ultra-loose monetary policy for the foreseeable future. This reinforces the significant interest rate differential between Japan and the United States, where the Federal Reserve’s key rate is over five percentage points higher. Consequently, strategies betting on continued yen weakness remain our primary focus.
The Japanese yen is likely to stay under pressure against the dollar, which recently touched levels above 151 not seen in over three decades. We see value in maintaining long positions in dollar-yen currency pairs through instruments like call options or futures. This policy divergence provides a clear and powerful driver for the trade.
Impact on Japanese Equities
This environment is also highly supportive of Japanese equities, particularly for exporters who benefit from a weaker home currency. The Nikkei 225 index has already rallied to 33-year highs, and we anticipate this momentum will persist as corporate profits are boosted. Therefore, holding long positions in Japanese stock index futures is a logical course of action.
Mr. Uchida’s caution is justified when looking at the underlying economic data. Japan’s real wages, which account for inflation, fell for the 18th consecutive month in September, signaling that domestic demand is not yet strong enough to sustainably support the central bank’s 2% inflation target. This data point validates the view that a rate hike is a distant event.
The deputy governor’s clear communication helps to suppress near-term policy volatility, creating an ideal climate for carry trades. We will continue to advocate for strategies that involve borrowing in yen at near-zero cost to invest in higher-yielding foreign assets. The current stability makes this a lower-risk proposition than it has been in previous months.
While October’s core consumer inflation hit 2.9%, his comments suggest this is viewed as imported, cost-push pressure rather than the desired demand-driven inflation. Historically, the central bank has waited for a durable link between wage growth and price increases before tightening policy. We expect this cautious historical precedent to guide their actions in the coming year.
