Candidate for the BoJ Governor, Kazuo Ueda, stated that Japan's current extremely low-interest rates are appropriate.

The USD/JPY exchange rate recorded a fantastic increase of about 1.2 percent to the range of 136.40 in New York trading on Friday (February 24th). The appreciation of the greenback and the increase in The Fed's interest rate projections contributed the most to this rally, as did the market's disappointment with the attitude of the candidate for the leadership of the Bank of Japan (BoJ).

usdjpy dailyDXY Daily chart via TradingView

This morning's core inflation data in Japan showed an expected increase from 4.0 percent to 4.2 percent (year-on-year) for January 2023. However, the increase was insufficient to push BoJ officials to take a more hawkish stance.

Kazuo Ueda, the strongest candidate to replace BoJ Governor Haruhiko Kuroda, told the Japanese parliament that the current low-interest rate is appropriate. He argued that Japan's inflation increase is mainly due to a surge in raw material import prices, not domestic demand. Therefore, interest rates should remain low to encourage inflation to rise in line with the central bank's target.

Analysts immediately responded to his view by revising their forward yen projections. A senior currency analyst at MUFG, Lee Hardman, assessed that the yen is at risk of further weakening. After breaking through the 135.00 threshold, the USD/JPY rally could continue to the 200-day MA above the 137.00 thresholds.

In his market commentary today, Kit Juckes, head of FX strategy at Societe Generale, also strongly criticized Ueda. He believes Ueda's opinion weighs down the yen and could even push USD/JPY to 140.00 if US Treasury yields continue to rise.

"He (Ueda) thinks the right way forward is to continue monetary easing while looking for other ways to respond to the current (Japanese financial market) situation. In other words, we can expect (BoJ) to manipulate the yield curve control (YCC) more, but we cannot expect tighter monetary policy."

"I suspect that efforts to manipulate YCC will end up being as unsuccessful as Britain's attempt to manipulate the sterling peg in the ERM (Britain's policy before Black Wednesday 1992). For now, yen appreciation is not receiving short-term support. He (Ueda) also dismisses inflation increases."

"Larry Summers (former US Treasury Secretary) told Bloomberg that we should consider Kazuo Ueda as Japan's 'Ben Bernanke' because they both attended MIT simultaneously and had the same thesis advisor. Whether that's a comforting thought is up to you..." said Juckes.