Bank of Japan Governor Kazuo Ueda warned lawmakers on Wednesday that the central bank’s capacity to stimulate the economy through additional rate cuts is becoming increasingly constrained, with the policy rate already at a historic low of 0.5%. The remarks came during a tense Diet session where policymakers grilled Ueda on the BOJ’s preparedness to address potential economic shocks.
Key Takeaways from Ueda’s Testimony
Diminished Policy Firepower
Ueda acknowledged that the BOJ has “limited room” to deploy conventional rate cuts should Japan’s economy face severe downturns, putting pressure on the bank to explore alternative stimulus measures.
The admission underscores the challenges facing central banks globally as they navigate post-pandemic monetary policy normalization with reduced toolkit flexibility.
Inflation Target Remains Elusive
Despite recent wage hikes and imported inflation, Ueda cautioned that achieving the BOJ’s 2% price stability target “will still take time,” citing weak domestic demand and falling real incomes.
Core CPI has remained stuck around 2.8%—above target but driven largely by cost-push factors rather than sustainable demand.
Future Rate Hike Contingency
The Governor reiterated that further rate increases would only occur if the BOJ gains “sufficient confidence” in a virtuous cycle of wage growth and demand-driven inflation.
Markets now price in just a 35% chance of another hike by October, down from 50% last month.
Market Reaction: Yen Slides to Fresh 2024 Lows
The yen immediately weakened on Ueda’s dovish tone, falling 0.5% to 145.25 per USD—its lowest level since November 2023. Analysts warn the currency could test the 150 threshold that previously triggered government intervention:
Rate Differential Widens: With the Fed holding rates at 5.25-5.5% and the BOJ anchored near zero, the yen remains the G10’s weakest currency in 2024 (-9% YTD).
Carry Trade Resurgence: Hedge funds are rebuilding short-yen positions, with CFTC data showing net bearish bets at a 17-year high.
Policy Dilemma: Growth vs. Currency Stability
The BOJ now faces a trilemma:
Stimulus Constraints: QE exhaustion and negative rates already lifted limit crisis response options.
Yen Depreciation Pain: While boosting exporters, a weaker yen exacerbates import inflation (energy +25% YoY) and household spending cuts.
Debt Sustainability: Higher rates risk destabilizing Japan’s debt-to-GDP ratio (263%), yet ultra-low yields distort bond markets.
What Next?
All eyes turn to June’s Tankan survey and spring wage negotiations for signs of durable inflation. As Finance Minister Shunichi Suzuki reiterated “concern” over the yen’s slide, traders await potential MOF intervention—though most analysts see 152 as the more likely trigger than 145.
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