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On Thursday, Bank of Japan Governor Kazuo Ueda expressed optimism regarding the U.S. economic outlook, noting its broadening strength. However, he emphasized that markets remain unstable, offering a mixed perspective on whether the risks to Japan’s economy are diminishing. 

When asked about the impact of recent yen depreciation on inflation, Ueda explained that the Bank of Japan must consider not only currency movements but also the underlying factors driving them, such as changing perceptions of the U.S. economy. “Recent declines in the yen are partly driven by increased optimism about the U.S. economy,” he said. The U.S. dollar has gained for four consecutive weeks against the yen, appreciating nearly 7% over this period. 

(U.S. Dollar/Japanese Yen Weekly Price Chart, Source: Trading View) 

Ueda’s comments on the U.S. economy and market conditions have drawn attention, especially after he recently highlighted uncertainty surrounding a potential “soft landing” in the U.S. and the volatility in financial markets as key risks. This uncertainty has prompted the Bank of Japan to maintain a cautious approach toward further interest rate increases. Market instability, with implied volatility still elevated, signals that the central bank remains vigilant against the potential for renewed market turmoil. 

Ueda reiterated that the Bank of Japan will continue to raise rates if the economy progresses in line with expectations. However, he stressed the importance of closely monitoring global uncertainties, such as the U.S. economic outlook, when determining the timing of the next rate hike. 

Adding to this complexity is the upcoming election in Japan, which could complicate the Bank of Japan’s plans for policy normalization. The potential for political instability may influence the central bank’s rate hike trajectory as it navigates the challenge of lifting interest rates from near-zero levels. 

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