Expectations for a significant interest rate cut by the Federal Reserve (Federal Reserve System) have receded following the September employment statistics in the United States.
The trend of the yen’s depreciation against the dollar, triggered by Prime Minister Ishiba’s remarks that he was cautious about further interest rate hikes, continued into the new week.

US employment statistics were a “home run”

Employment statistics released in the United States on the 4th showed the strength of the labor market.
The number of non-farm employees increased by 254,000 compared to the previous month, far exceeding the market estimate of an increase of 150,000, and the unemployment rate decreased to 4.1% from 4.2% in the previous month. Growth in average hourly wages also exceeded market expectations.

American media reported that it was a “home run,” with the content dispelling concerns surrounding the rapid deterioration of employment that had been mounting since the summer. Financial markets, which had expected a rapid rate cut to continue, began to revise their outlook. Expectations of a significant rate cut by the Federal Reserve have receded, and there is a growing expectation that the Fed will cut rates by 0.25% at its November meeting.
In the U.S. bond market, long-term interest rates rose significantly, with the yield on 10-year bonds at around 4%, the lowest level in about two months.

In the foreign exchange market, where the yen had been moving towards a weaker direction, the dollar’s appreciation accelerated, and on the morning of the 7th, at the beginning of the week, the yen exchange rate was at one point at around 149 yen.10 to the dollar, the lowest level in about a month and a half. The dollar hit a high level.

“Cautionary” statement about interest rate hike that triggered the trigger

It was Prime Minister Ishiba’s remarks that triggered the rapid trend toward a weaker yen.

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After meeting with Bank of Japan Governor Kazuo Ueda, Mr. Ishiba said on the night of the 2nd, “I don’t think the environment is conducive to raising interest rates further,” although he said it was “my personal opinion.”

In the market, Mr. Ishiba, who was said to have shown a certain understanding of the Bank of Japan’s policy normalization before taking office, was perceived to be taking a cautious stance on further interest rate hikes, and expectations for an interest rate cut within this year have receded.

It is unusual for the prime minister to specifically mention the Bank of Japan’s monetary policy.

The sell-off of the yen was supported by the results of the ADP National Employment Report in September, which was subsequently announced, and the momentum quickly became stronger, led by foreign investors.The yen depreciated by nearly 4 yen in the day before and after his statement.

Prime Minister Ishiba said on the night of the following day, 3rd, “Keeping in mind that it has been explained that it is necessary to assess the situation of domestic and overseas financial markets and the economy, and that there is time to do so, I agree with that understanding.” However, there was a widespread view among market participants that “the hurdles for the Bank of Japan to raise interest rates have become higher.”

The Nikkei average stock price recovered to the 39,000 yen level at the end of the week

The continued depreciation of the yen will be a tailwind for Japanese stocks, especially export-related stocks.

Mr. Ishiba’s victory in the Liberal Democratic Party presidential election was a reversal of the “Takaichi trade” when Mr. Takaichi advanced to the run-off election, and immediately brought about a reversal to the yen’s appreciation and stock price decline, but Ishiba’s statement As a result, the yen depreciated, and buying spread to a wide range of stocks in the Tokyo stock market on the 3rd, with the Nikkei Stock Average at one point rising above 1,000 yen.

Along with the weaker yen, the rise in Japanese stocks is supported by rising stock prices in the American market.
In the New York market on the 4th, the Dow Jones Industrial Average hit a new high as buying orders spread based on the outlook that the economy is strong following the employment report.

Expectations were high for a “soft landing,” in which inflation would subside without the economy worsening, with the view that a strong labor market would support consumption.
On the 7th of the week, the Tokyo market continued the trend of high stock prices in the United States, with investors’ increased risk appetite and widespread buying, with the Nikkei stock average rising at one point approaching 900 yen in the morning.

Inconsistency with inflation measures and “more time” for additional interest rate hikes

The trend toward a weaker yen and higher stock prices based on Prime Minister Ishiba’s comments has been supported by the solidity of the American economy, but further depreciation of the yen will increase the profits of exporting companies, while increasing the profits of importers. This will cause an increase in prices. This could put upward pressure on consumer prices and contradict the Ishiba administration’s measures to combat high prices.

At a press conference after the monetary policy meeting in September, Governor Ueda acknowledged that there was “more time” to judge the necessity of further interest rate hikes, but he cited import prices as the basis for his decision. The upside risk to the yen has been “reduced accordingly” due to the correction of the weaker yen.

If the yen continues to depreciate, the Bank of Japan’s monetary policy may face a difficult situation in terms of the amount of time it has to decide on additional interest rate hikes.

We need to carefully monitor the fate and impact of the weak yen and rising stock prices triggered by Ishiba’s remarks.
(Yuichi Chida, Fuji Television Commentary Vice Chairman)