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Bank of Japan (BOJ) Governor Kazuo Ueda showed little urgency during a press briefing on Thursday regarding the weakening yen, dampening expectations of immediate monetary tightening. Earlier in the day, the BoJ kept its key interest rate at 0.25%, extending the status quo for the third consecutive policy meeting.

The yen is approaching levels last seen during Japan's intervention in April and May to stabilize its currency against the dollar. However, Governor Ueda downplayed these concerns, saying: “Import inflation is relatively stable on an annual basis.” This lack of immediate action has left markets uncertain about the BoJ's next move.

Market participants had speculated about a possible rate hike during the BOJ's two-day meeting, but Ueda stressed the need for more data. “One of the reasons we've been cautious about raising rates this time is because we decided we needed a little more information about the dynamics behind the wage increases, which the BoJ sees as the key to maintaining 2% inflation,” Ueda explained.

Tomoaki Shishido, an interest rate strategist at Nomura Securities, called Ueda's stance “extremely dovish,” noting that it reduced the likelihood of a short-term rate hike. “He did not rule out a rate hike in January, but his remarks suggest the likelihood is much lower than market expectations,” Shishido said. Nikkei Asia.

Some believe Ueda's hesitation could be a strategic move to pressure politicians into pushing for rate hikes. Prominent lawmakers, including Prime Minister Shigeru Ishiba, have already expressed resistance to such measures, given the potential economic repercussions.

The BoJ's post-meeting statement remained largely unchanged, providing little insight into the decision to keep rates steady. He reiterated that “Japan's economy will continue to grow at a rate higher than the potential growth rate due to the gradual intensification of a virtuous circle from income to spending.” However, the statement highlighted continuing risks, such as “significant uncertainties surrounding Japan's economic activity and prices, including changing economic conditions overseas.”

Japan's core inflation, as estimated by the BOJ, has been slowing since late last year, currently hovering between 0.8% and 1.5%. Analysts remain divided on the timing of the next rate hike, with surveys indicating mixed expectations from next month through March.

The depreciation of the yen, exacerbated by the widening interest rate gap between Japan and the United States, has led to rising costs of imported goods such as food and energy. This trend disproportionately affects low-income households and small businesses, intensifying calls for monetary policy adjustments.

On Wednesday, the US Federal Reserve lowered its interest rate for the third time this year, to a range of 4.25% to 4.5%. The move sent the yen as low as 154.70 against the dollar, with some analysts warning it could hit a 37-year low of 161 against the dollar in 2024.

The BOJ faces a delicate balancing act as it seeks to normalize monetary policy without disrupting financial markets. The last rate hike in July caused the yen to rise 8% and triggered an 18% sell-off in Tokyo stocks. Analysts suggest that this experience made Ueda cautious about sudden political changes.

Looking ahead, the BOJ is monitoring wage growth and consumer inflation to determine the appropriate timing for any rate hikes. External risks, including China's slowing economy and uncertainty over US President-elect Donald Trump's proposed tariffs, further complicate Japan's economic outlook.