The recent weakening of the Yen is increasing the likelihood that the Bank of Japan (BOJ) will raise the benchmark interest rate next month, according to Kazuo Momma, former CEO of the BOJ.
The possibility of a rate hike in December is quite high, as long as there is no big bad news and the Yen is still in the current price range, said Mr. Momma in an interview with Bloomberg on Tuesday, as the exchange rate fluctuated around 156.80 Yen/USD. There is no need to wait for stronger signs from data such as wages, prices or economic growth.
The weakening of the Yen comes as investors are looking to predict whether the BOJ will raise interest rates in December or postpone it to January, amid signals of increased support for an early move in the Politburo.
The weak Yen is boosting inflationary pressures through rising import costs, as it hit a 10-month low against the USD last week a level that the Japanese government has operated on in the market in the past.
To reduce the cost of living burden, Prime Minister Sanae Takaichi announced on Friday the first economic support package since the lifting of epidemic regulations, with the largest new spending in many years.
With Takaichi's top priority being to help households cope with high inflation, Mr. Momma said that the Prime Minister - who supports monetary easing - could let the BOJ raise interest rates, a move that could support the Yen and reduce price pressure.
The weak Yen is the biggest enemy of price control measures, said Mr. Momma. Takaichis confidence is based on public expectations that she will solve the cost of living problem, so controlling the Yen is extremely important.
Signals from the government and the BOJ internal strengthen the possibility of increasing interest rates
Last week, Finance Minister Satsuki Katayama strongly warned speculators, emphasizing that monetary intervention is still an option. According to Mr. Momma, this tough stance shows that the government has been impatient with the Yen's decline, thereby reducing the barrier to a BOJ interest rate hike decision.
The Yen has lost about 5% in the past three months, the sharpest decline in the group of major currencies watched by Bloomberg.
Governor Kazuo Ueda said last week in Congress that the BOJ must closely monitor the impact of a weak Yen on core inflation, as the consumer price index (CPI) in the most recent month increased to 3%, higher than the 2% target for more than 3.5 years.
According to the overnight stock market (OIS), the possibility of the BOJ raising interest rates at its meeting on December 19 is about 40%, and will increase to 90% in January 2026.
A Bloomberg survey last month also showed that December is considered the most likely time.
However, Mr. Momma said that the possibility of the BOJ waiting until January cannot be ruled out, because at that time the central bank will have more data on the increase in salaries and the resilience of the US economy.
Support for interest rate increases in the coming time is increasing in the Policy Council.
The two members who voted in disagreement at the two most recent meetings continue to support early policy tightening, while some other members are also leaning in this direction.
Kazuyuki Masu, the newest member of the 9-person council, told Nikkei last week that the time to raise interest rates is approaching, in a slight departure from the cautious stance when he took office five months ago.
Junko Koeda, another member, said the BOJ should continue to normalize policy, while Asahi Noguchi, who is considered the more harmonious, will speak on Thursday after a surprise hawk signal in September.
Mr. Momma said that the recent statements of the council members did not go further than the stance of Governor Ueda, who is still open to raising interest rates in December or January.
If Ueda decides to act in December, the council will agree, said Momma. If he wants to wait until January, the members who have never objected will probably agree.
