Ambiguous remarks: Will the Bank of Japan, which traders cannot predict, face a credibility crisis?

Recently, the closing of yen carry trades has caused a major turmoil globally, prompting the Bank of Japan to step in to calm the markets.

According to the China Fortune Financial App, Bank of Japan Governor Haruhiko Kuroda issued a clear message last week - a weak yen is a risk, and interest rates may continue to rise. Traders' reaction to Kuroda's apparent shift to a hawkish stance was very strong. The yen surged more than 3% against the US dollar, and the Japanese stock market experienced its largest drop since 1987.

In response, Deputy Governor Masayoshi Amamiya conveyed a new message this week - there will be no rate hikes as long as the market remains turbulent. This statement received the expected response, partially reducing the yen's sharp gains and helping to calm the markets.

However, this also left investors confused about how much confidence to place in the Bank of Japan's statements, highlighting how difficult it is for the central bank to limit market shocks as it moves to unwind years of unconventional monetary stimulus measures.

Charu Chanana, head of currency strategy at Shengbao Bank, said, "The Bank of Japan's ambiguous remarks will only trigger more volatility. As long as they maintain consistent communication, they can at least shield themselves from panic and unnecessary fluctuations in the yen and stock markets."

The summary of the Bank of Japan's July meeting showed that some of the nine board members emphasized that monetary policy will remain accommodative. However, the possibility of a Japanese rate hike disrupted carry trades, where investors borrow low-interest rate currencies and invest the funds in higher-yielding markets. According to data from JP Morgan, three-quarters of global carry trades have now been unwound.

Masayoshi Amamiya stated that his views are not contradictory to Haruhiko Kuroda's. Extreme market volatility following the central bank's decisions has created an environment different from that during policy meetings. Amamiya stated that once the market is calm enough, the Bank of Japan still intends to consider rate hikes. However, this explanation has not satisfied some overseas investors.

James Malcolm, macro strategist at UBS in London, said, "Communication always needs to be clearer, more direct. Global investors do not have the time, willingness, or background to understand the subtle differences in the Bank of Japan's communication."

Australia and New Zealand Banking Group's foreign exchange strategist Carol Kong said Amamiya's remarks are "damage control for the Bank of Japan."

She said, "The recent market turmoil serves as a reminder to the Bank of Japan that, given the large positions in yen, both their actions and words can have significant impacts."

Overnight index swap data shows that as of Friday morning, the likelihood of a 25 basis point rate hike by the end of the year is 31%, down from over 60% at the time of last week's meeting. Hideo Kumano, economist at Dai-Ichi Life Research Institute and former Bank of Japan official, said that while recent market turmoil may lead to a delay in rate hikes, it may not necessarily prevent the central bank from hiking rates again.

"Once the market stabilizes, the Bank of Japan will gradually send signals to the market for the next rate hike," Kumano said. "I believe the Bank of Japan will be more cautious in its communication, so the timing of the next rate hike may be delayed."

Other traders sympathize with Ueda and Oto's position. Japan's inflation rate has been consistently above the central bank's 2% target, partly due to the weakness of the yen. Raising interest rates is a clear way to support the currency, which is beyond the central bank's mandate to impact traders.

Yukio Ishiuki, Senior FX Strategist at Daiwa Securities in Tokyo, said, "Despite the Bank of Japan's communication having a sense of randomness, they could not have anticipated such large market fluctuations. Ueda and Oto are determined to correct the weakness of the yen, so I believe the timing of this meeting is inevitable."

Furthermore, due to the divergence between market expectations and the actual intentions of the central bank, leading to misinterpretations of official statements or policy signals, central banks around the world often face challenges in conveying clear messages. For example, due to volatile data and cautious messages from Federal Reserve officials, there has been significant volatility in bets on U.S. rate cuts this year.

Harumi Taguchi, Chief Economist at S&P Global Market Intelligence, said, "The Bank of Japan's remarks themselves have not changed much, but the market has overreacted to its tone and which parts are being focused on. Communication is very challenging."