The Japanese yen is hovering close to its weakest level since 1998, and authorities have suggested taking action to stem the currency’s decline.
Ahead of the Bank of Japan’s rate decision later this week, CNBC is looking at whether Japan’s central bank could move away from its ultra-easy monetary policy as the Federal Reserve maintains its aggressive stance, signaling even more aggressive rate hikes to come.
The widening interest rate differential has led to the yen weakening significantly, with the Japanese currency falling about 25% year-to-date.
According to the Japanese newspaper Nikkei, the Bank of Japan reportedly conducted an exchange check last week.
The so-called check, as the Nikkei explained, involves the central bank “examining trends in the currency market” and is widely seen as a precursor to physical intervention to defend the yen.
Despite the rumors of a physical intervention in the forex markets, analysts are all pointing to a different reason behind the weakening yen: the Bank of Japan’s yield curve control (YCC) policy – a strategy implemented in 2016 that has boosted the 10-year Japanese government limits bond yield around 0% and offers to buy unlimited number of JGBs to defend an implied limit of 0.25% around the target.
The yield curve control policy aims to bring inflation in Japan to a target of 2%. On Tuesday, Japan reported that core inflation rose 2.8% in August from a year ago, the fastest growth in nearly eight years and the fifth consecutive month in which inflation exceeded the BOJ’s target.
HSBC’s Senior Asia FX Strategist Joey Chew said defending these policies would be the central bank’s priority rather than a currency intervention, which would be decided by the Treasury Department and implemented by the Bank of Japan.
“The BOJ will make bond purchases — theoretically unlimited — to maintain its yield curve control policy,” Chew told CNBC last week. He added that such monetary operations would somewhat contradict any exchange rate action, as the selling of the dollar and yen would tighten the liquidity of the Japanese currency.
“Talking about FX intervention right now may not have a material impact,” Chew said. “Even actual intervention can only lead to a major but short-lived response.”
Chew pointed to restrictions from previous cases when Japan intervened to defend its currency.
Strategists at Goldman Sachs also fail to see the central bank deviating from its yield curve control policy, pointing to its aggressive global competitors.
“Our economists expect the BOJ to resolutely maintain its commitment to YCC policy at this week’s meeting, against a backdrop of five other G10 central banks all likely to implement major rate hikes,” they said in a statement earlier this week. note.
Goldman Sachs says that while direct intervention should be more likely with tariff controls reports, economists see the odds of a successful operation in defending the yen as “even lower.”
End of Abenomics
Changes in monetary policy by the Japanese authorities are unlikely as the odds are particularly low under BOJ Governor Harukiho Kuroda, UBS chief economist for Japan Masamichi Adachi told CNBC last week.
“One option they would present is to change the current neutral guidance to ease forward guidance to just neutral,” he said, adding that the probability is 20% to 30% maximum.
One of the first indicators of a shift in Japan’s monetary stance would be to abandon the economic policies of Prime Minister Fumio Kishida, Shinzo Abe, commonly referred to as Abenomics, according to Nomura.
“The first necessary step towards normalization would be for Prime Minister Kishida to show that his policy priority has now deviated from Abenomics, and he will not tolerate any further depreciation of the yen,” said Naka Matsuzawa, Japan’s chief macro strategist at Nomura. week.
The Bank of Japan’s next two-day monetary policy meeting will conclude on Thursday, a day after the US Federal Open Market Committee meeting, where officials are widely expected to raise interest rates by an additional 75 basis points.