November 24, 2022
  • November 24, 2022

BOJ set to maintain policy despite yen weakness as peers hike rates

By on September 20, 2022 0

The Bank of Japan is widely expected to hold ultra-low rates at the end of its regular two-day meeting from Wednesday, reinforcing that it will remain the laggard among major central banks in the shift to monetary tightening, even at the expense of a weaker yen.

After the yen fell to a 24-year low against the US dollar and Japanese authorities warned against direct currency intervention to avoid further decline, financial markets were on high alert for any clues. a change in the BOJ’s messaging on yen weakness and inflation, which remained above its 2% target.

On Thursday, the BOJ will likely set short-term interest rates at minus 0.1% while guiding 10-year Japanese government bond yields around zero% soon after the US Federal Reserve is expected to rise further. rates to control soaring inflation.

The Bank of England will follow, while the Swiss National Bank may end its negative rate policy.

File photo taken in March 2020 showing the Bank of Japan headquarters in Tokyo. (Kyodo)

Market analysts expect yen weakness to continue, reflecting the BOJ’s dovish tilt. No adjustment in monetary policy would likely accelerate the yen sell-off even after more verbal intervention from Japanese authorities and BOJ surveys of dealers on dollar-yen rates last week, seen as a precursor to intervention. real.

Asked about his views on market expectations for policy adjustment, Finance Minister Shunichi Suzuki said how to guide monetary policy was in the hands of the BOJ. “We expect the BOJ to make efforts to achieve its objective of price stability in a sustainable and stable manner in accordance with the joint statement (with the government),” he told a conference on Tuesday. hurry.

The BOJ’s view that the recent surge in inflation is mainly due to rising energy and commodity costs and should therefore be transitory has come under intense scrutiny.

The country’s core consumer inflation, which excludes volatile fresh food prices, jumped 2.8% in August, the fastest pace in nearly eight years. It was above the central bank’s 2% target for five consecutive months.

Economists say the headline inflation figure will likely rise further and top 3% before the end of the year, in part because of the rapidly weakening yen, which is inflating Japan’s import costs.

The yen fell nearly 145 against the dollar at the start of the month. Breaking the 145 barrier will likely accelerate the yen’s slide towards 147.66, a level not seen since 1998, with 150 being the next resistance level, according to currency analysts.

Koji Fukaya, a fellow at consultancy Market Risk Advisory Co., warns of general yen weakness after the Swiss National Bank hiked rates. The yen and franc have been low-yielding currencies, considered safer in times of market uncertainty.

“The focus is on whether the BOJ will make policy changes that would curb yen depreciation or pave the way for the currency to test 147,” Fukaya said. “The risk is that the yen sell-off will accelerate if no changes are made…and given that the authorities cannot stop it.”

The last time Japan intervened in the currency market by buying the yen against the dollar was in 1998.

Governor Haruhiko Kuroda has pointed to the negative side of the yen’s weakness, saying earlier this month that rapid swings were “adverse”.

Kuroda argued that monetary easing is needed for Japan as its economy is still recovering from the fallout of the COVID-19 pandemic and faces downward pressure from rising commodity prices. .

He said aggressive rate hikes would be needed to halt the yen’s slide against the dollar, which could cause considerable damage to the economy, sounding pessimistic about a near-term tightening.

The world’s third-largest economy saw annualized real growth of 3.5% in the April-June quarter, but growth is expected to slow in the current quarter.

It is widely expected that the BOJ will end its pandemic relief program to support financially distressed small and medium-sized businesses amid the pandemic at the end of September, as planned.

Related coverage:

Japan warns against intervention, BOJ conducts ‘rate checks’ amid yen drop

Bank of Japan chief warns rapid yen moves are ‘adverse’