Expectations are building that the Bank of Japan could raise interest rates again in October, after U.S. President Donald Trump was confirmed to have voiced concern about the weak yen at a summit with Japan. With the U.S. midterm elections set for Nov. 3, analysts say Washington's political pressure on Tokyo to stabilize the currency is likely to intensify as worries grow that a weak yen could hurt the U.S. trade balance and push up long-term interest rates.
According to Japanese media including the Nikkei on the 27th, Japanese Prime Minister Sanae Takaichi told a news conference at the prime minister's office on the 25th that "at the Japan-U.S. summit held on the 23rd, President Trump made remarks to the effect that the weak yen is making trade difficult for the United States."
Japanese Finance Minister Satsuki Katayama also said Trump had expressed concern about the weak yen. Because currency issues are normally handled through finance-minister-level channels, the fact that the matter was raised directly between the two leaders is being seen as unusual.
Behind this lies the approaching midterm elections. A weak yen can strengthen the price competitiveness of Japanese goods, working to widen the U.S. trade deficit with Japan. Adding to that is concern that selling of the yen and Japanese government bonds could spill over into selling of U.S. Treasurys, driving up long-term U.S. interest rates and mortgage rates.
Takaichi drew a line, saying monetary and fiscal policy itself was not discussed at the summit. Still, some expect that if the yen's weakness gains momentum again, pressure could mount for a second straight rate increase at the Bank of Japan's monetary policy meeting scheduled for the 29th and 30th of next month, following its September move. The Japanese government had already been working to calm the yen's slide before the summit. On the 18th, the Bank of Japan raised its policy rate by 0.25 percentage point to 1.25% from 1.0%.
According to the Nikkei, markets have also begun pricing in the chance of an October hike. Expectations for rate increases through October, calculated by Totan Research based on the interest-rate swap market, stood at 0.31 times, meaning the market sees a more than 30% chance of an additional 0.25 percentage point increase next month.
Factors inside the Bank of Japan also lend weight to the possibility of back-to-back increases. Eiji Maeda, a former BOJ executive director, said, "If the yen weakens further and upward price pressure is confirmed through economic indicators and reports from the branch managers' meeting, the chance of an October hike will rise further." Even so, BOJ Governor Kazuo Ueda has said he would take a cautious approach to avoid unsettling markets, even as he keeps open the option of a rate increase following September's.
