How BOJ Policy Can Affect Yen Weakness

The Bank of Japan may be limited in its ability to deal with the recent weakness in the yen, but experts who spoke with CNBC noted that the currency isn’t really the central bank’s focus anyway.

The Japanese yen rose above 130 against the dollar on Thursday after the Bank of Japan reiterated its ultra-easy stance on monetary policy, a stark contrast to peers in other advanced economies where central banks have expressed concerns about inflation.

As of Friday afternoon during Asian trading hours, the Japanese currency was trading at 130.21 per dollar, a sharp weakness from levels near 115 it was trading against the dollar in early March.

The exchange rate is not in the state of the Bank of Japan.

Takatoshi Ito

Former Japanese Deputy Finance Minister

The Japanese yen has seen sharp weakness for weeks against the US currency, as the outlook for monetary policy between Japan and the US continues to differ.

On Thursday, the Bank of Japan pledged to buy unlimited amounts of bonds daily to defend its yield target.

On the other hand, the US Federal Reserve Chairman reiterated the central bank’s determination to take strict measures against inflation. The CME FedWatch tool shows that markets are largely anticipating a 50bp rate hike in May.

“A lot of people are talking in this context that the Bank of Japan may adjust … their policy framework,” said Kazuo Momma, executive economist at Mizuho Research & Technologies. “I think it is unreasonable or very difficult for the Bank of Japan to do anything about it.”

First, the spread between Japanese and US interest rates will still be “huge” even if the BoJ decides to “adjust a little bit of interest rate,” Momma said.

Moreover, he warned that any move in the BOJ’s yield curve control policy could be counterproductive and lead to market speculation regarding the central bank’s next moves. Yield curve control is a policy of the Bank of Japan that aims to stimulate the country’s economy by keeping the 10-year Japanese government bond yield at around 0%.

“Just one step would be a very dangerous step for the BOJ to do so… They are cautious about sending any message to respond to market pressures,” Moma said. “They will continue to send a strong signal that they will stay the course in terms of yield curve control.”

Meanwhile, two experts told CNBC that the Bank of Japan has taken the “right step” as its current task is to help the economy reach an elusive inflation target.

“The exchange rate is not within the mandate of the Bank of Japan,” said Takatoshi Ito, who previously served as Japan’s deputy finance minister. He said concerns about a weak yen should be dealt with by the Japanese Ministry of Finance instead.

“The interest rate yes has an effect on the exchange rate but it also affects it [capital expenditure] “And housing loans, mortgages and other long-term assets. It’s a very indirect way to influence the exchange rate,” said Ito, who is currently a professor of international and public affairs at Columbia University.

In agreement with Ito, RMB Capital’s Masakazu Hosumi said the BoJ’s current policy stance is in line with its focus on fighting deflation.

Since 2016, the Bank of Japan has adopted negative interest rates in an attempt to reverse decades of deflation by encouraging borrowing and spending. Those efforts had a limited effect in reaching the Bank of Japan’s 2% inflation target, preventing it from raising interest rates.

“The biggest problem in Japan has been deflation, not inflation, unlike in the United States and Europe,” said Hosumi, partner and portfolio manager at the company.

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