(The article was written before the BOJ Interest Rate decision announcement)

The Federal Reserve (FRB) has made a bold move by significantly cutting interest rates, a decision that comes after a four-and-a-half-year hiatus. The Tokyo financial market responded to this decision with a weaker yen and higher stock prices. However, the Bank of Japan (BOJ) is exploring further rate hikes, emphasizing the two countries' stark differences in monetary policies. The future development of the turbulent market remains uncertain.

Following the FRB's rate cut, the foreign exchange market initially saw the yen strengthen against the dollar. This movement was driven by the perception that the interest rate gap between Japan and the US would narrow, prompting investors to sell dollars. However, as the view spread that future rate cuts would be gradual, the yen's depreciation accelerated. On September 19, the Tokyo market briefly reached around 143.90 yen per dollar, about 2 yen weaker than the previous day's close.

The weaker yen was also well-received in the stock market. Buying centered around export-oriented companies, and the Nikkei Stock Average surged by over 1,000 points at one point, compared to the previous day's close. It ended the day 775.16 points (2.13%) higher at 37,155.33, recovering to the 37,000 level for the first time in about two weeks since September 4.

However, it remains uncertain whether this trend will continue. While the FRB has shifted gears to rate cuts after four and a half years, the BOJ has just begun raising rates. In March, the BOJ ended its "extraordinary" monetary easing that lasted for about 11 years and decided on a rate hike for the first time in 17 years. In the July meeting, they moved to raise rates further.

Since August, when concerns about a US recession grew, the market has been unstable, with the Nikkei average falling due to a rapid yen appreciation. Despite this, the BOJ has not wavered from its stance of proceeding with rate hikes if prices and the economy follow the expected scenario. This difference in monetary policies between Japan and the US could trigger yen appreciation against the dollar, which would weigh on Japanese exporters.

The pace at which the BOJ will proceed with rate hikes remains uncertain. Few market participants expect a rate hike at the BOJ's monetary policy meeting, which will continue until September 20. According to Ueda Yagi Tanshi, 98% of participants predict that the current status quo will be maintained at this meeting. The US rate cut has also put a brake on excessive yen depreciation, which could lead to upward pressure on prices, and some within the BOJ believe that "there is no need to rush to raise rates."

Ryutaro Kono of BNP Paribas Securities stated, "If the FRB's rate cut increases the likelihood of a soft landing for the US economy, it will not hinder the BOJ's rate hikes." He added, "The BOJ may raise rates as early as December, without much delay."

*Article excerpt inspired by Asahi Japan, written before the BoJ Interest Rate decision, which was announced to be a hike of 25 basis points at 11 a.m. Japan time.