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Bank of Japan Governor Kazuo Ueda skillfully danced around the topic of imminent interest rate hikes during his latest speech at a Tokyo business conference. He kept financial markets guessing by emphasizing the need to continuously monitor economic risks, subtly nudging the yen downward with his comments.

Ueda articulated, “The timing and pace of adjusting the degree of monetary accommodation will depend on developments in economic activity and prices as well as financial conditions going forward.” This carefully worded statement comes hot on the heels of his remarks last week, suggesting a longer wait for rate hikes, much to the surprise of investors who were bracing for a January increase. Ueda's cautious tone, partly attributed to the unpredictability of U.S. President-elect Donald Trump's policies, triggered an unexpected dovish turn that sent the yen tumbling and drew sharp warnings from Japan’s finance ministry about speculative currency plays.

On Wednesday, Ueda continued to play it safe. He reiterated the dual need to sustain low interest rates to support the economic landscape while also flagging the potential hazards of keeping rates too low for an extended period. He emphasized the critical balance the bank must maintain, stating, “The bank needs to pay due attention to various risk factors at home and abroad, and to examine how these factors will affect the outlook and risks for Japan’s economic activity and prices and the likelihood of realizing the outlook.”

Currently, the yen is trading delicately on the weaker side of 157 but steering clear of the perceived intervention-trigger zone of 158-160. The market sentiment reflects this cautious optimism, with traders assigning a 46% likelihood of a January rate hike and about an 82% chance by March, gleaned from the latest overnight-indexed-swap rates. This has prompted FX traders to adjust the spot JPY, pricing in an additional 6 to 8 weeks of negative carry.

Caught between a rock and a hard place, the BOJ grapples with the timing of its next move. Despite inflation hitting its target and the economy showing moderate growth, there's a tangible wariness about ramping up rates. With Japan's economy deeply tied to exports, the looming spectre of a global trade war makes the decision to raise interest rates a high-stakes gamble. Policymakers, including the hawkish contingent, must tread cautiously, mindful of the delicate balance between stimulating domestic growth and navigating the treacherous waters of international trade tensions.

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