Japan's Rate Hike Dilemma: Will Ueda Calm Market Storms at Parliamentary Hearing?

Kazuo Ueda, the Governor of the Bank of Japan, will be closely watched as he attends a parliamentary hearing on Friday. Previously, the Bank of Japan's move to raise interest rates and Ueda’s hawkish stance caused a significant upheaval in global financial markets earlier this month.
Starting from 9:30 AM local time, Ueda will answer questions from lower house lawmakers, followed by another session in the upper house beginning at 1 PM. This unusual hearing is taking place during a parliamentary recess, indicating immense pressure on the Bank of Japan to justify its rate hike decision.
Global markets were severely impacted by the hawkish signals from Japan's central bank, with roughly $6.4 trillion in market value wiped out, including a record drop in the Nikkei 225. The Committee's decision on July 31 to raise its benchmark rate to 0.25% from 0-0.1% was accompanied by Ueda's assurances that further rate increases were likely, causing market panic.
This turmoil prompted significant fluctuations in the Nikkei 225 and a sharp surge in the yen, resulting in mass unwinding of global carry trades. The markets have since moderately rebounded, with the S&P 500 and Nikkei 225 recovering from their lows.
Before Federal Reserve Chair Jerome Powell's speech at the Jackson Hole symposium on Friday, Ueda might seek to minimize additional market volatility. Bank of Japan watchers speculate that Ueda will avoid making policy commitments during this period of financial instability.
NLI Research Institute's senior economist Tsuyoshi Ueno mentioned that Ueda's goal is to avoid triggering another round of market shocks. This hearing is prompted by the global market's disturbances following the Bank of Japan's hawkish pivot. If Ueda adds to this instability, it would constitute a significant challenge for the bank.
Earlier statements by the Bank of Japan's Deputy Governor, Shinichi Uchida, sought to alleviate market concerns by indicating a pause in rate increases during periods of financial instability, maintaining current rates temporarily.
Despite some market calm since Uchida’s remarks on August 7, the differing tones between him and Ueda have raised concerns. Close observers of the Bank of Japan are keen to see whether Ueda will adopt any nuanced changes in his stance.
With the year progressing, many still believe additional rate hikes from the Bank of Japan are possible due to the pressures of maintaining market stability. Charu Chanana, head of FX strategy at Saxo Markets, expects Ueda to stick to his previous plans of rate hikes while underlining Japan's inflation and wage growth trends, albeit in a more balanced tone to avoid unsettling the market further.
Ueno from NLI Research Institute explained that any strong hawkish signals from Ueda could strengthen the yen while causing another stock market plunge. Conversely, dovish signals could lead to yen depreciation, drawing Japan back to its pre-July complications.