A new risk facing the yen is emerging, with currency strategists in Tokyo warning that the Bank of Japan may maintain interest rates until March next year or later.

On Wednesday, the yen exchange rate fell to its weakest level in more than two weeks as traders reacted to a report from foreign media. The report stated that, according to sources familiar with the situation, even if the Bank of Japan decides to wait until January or later to raise rates, authorities believe it will not come at a huge cost, as there are signs that the risk of inflation overshooting is limited. However, they remain open to raising rates next week, depending on data and market developments.

Additionally, according to Reuters, five sources familiar with the Bank of Japan's thoughts stated that the central bank is inclined to maintain stable interest rates next week, as decision-makers prefer to spend more time carefully studying overseas risks and clues about next year's wage outlook. Any such decision would increase the likelihood of rate hikes in subsequent meetings in January or March next year, when more information about wage increases for next year will be available.

Insiders say there is no consensus within the Bank of Japan on the final decision, with some committee members still believing that Japan has met the conditions for a rate hike in December. The final decision will depend on each committee member's belief in the possibility of Japan achieving sustained price increases driven by wages. If upcoming events, such as the Federal Reserve's decision (announced just hours before the Bank of Japan's meeting), trigger another sharp decline in the yen, thereby increasing inflationary pressure, the Bank of Japan may also lean towards taking action.

Overall, many decision-makers at the Bank of Japan seem reluctant to pull the trigger. This has made yen bulls slightly aware of future dangers.

Shusuke Yamada, head of Japanese currency and interest rate strategy at Bank of America in Tokyo, said that if the Bank of Japan's decision-makers delay the rate hike for a longer time, the situation will be very different.

Shusuke Yamada stated on Thursday: 'If the interest rate hike is postponed to March next year, the yen carry trade theme is likely to resurface. The yen may weaken again, falling to 155 or slightly below the 157 level reached in November.'

Among economists surveyed by Bloomberg, 44% predict that the Bank of Japan will raise rates next week, while 52% believe it will happen in January next year. However, indications from overnight index swaps suggest that the Bank of Japan will slow the pace of rate hikes. These data indicate that the likelihood of a rate hike in December has dropped to 19%, while the probability for January is 78% and for March next year is 95%.

Takeru Yamamoto, a trader at Sumitomo Mitsui Trust Bank in New York, stated: 'If the results prove that they cannot raise rates in January, then this could lead to a lack of trust in whether the Bank of Japan can really raise rates. The yen could potentially fall to a higher range around 150 against the dollar.'

Bank of Japan Governor Kazuo Ueda stated in an interview with the Nikkei last month that interest rate hikes are 'around the corner.' A few days later, a report from Japan's Jiji Press emphasized that concerns within the central bank about raising rates too early are increasing. Dovish committee member Toyoaki Nakamura stated last week that he does not oppose rate hikes but wants to see the data to decide this month's policy.

Eiichiro Miura, head of strategic investments at Nissay Asset Management Corp, stated that it is unlikely to raise rates before the meeting in April next year or later.

However, Carol Kong, a currency strategist at the Commonwealth Bank of Australia in Sydney, and others also pointed out that further depreciation of the yen may prompt the Bank of Japan to raise rates sooner. She said that the latest U.S. inflation data has increased the likelihood that the Federal Reserve will issue hawkish signals while cutting rates next week, which will weaken the yen against the dollar and increase the likelihood of rate hikes by the Bank of Japan.

Article forwarded from: Jin Shi Data