MNI INSIGHT: BOJ Left With Jawboning As Yen Weakens

The Bank of Japan is increasingly uncomfortable with the weakening yen, but its options for addressing the depreciation of the currency are narrowing as downside risks to the economy grow, leaving it to rely on verbal intervention in concert with the Ministry of Finance, MNI understands.

With the yen on a steepening downward trajectory, BOJ Governor Haruhiko Kuroda has changed his previously neutral tone on its valuation, emphasising the negative impact of depreciation on corporate profit margins and households’ purchasing power. Finance Minister Shunichi Suzuki also said on Tuesday that he was closely watching the exchange rate, and that rapid moves were undesirable.

In the past, the Bank of Japan has directly intervened in foreign exchange markets, acting on instructions from the Ministry of Finance. The last time it bought yen was in 1998.

Until recently, the BOJ had calculated that should the yen hit 125 to the dollar it could widen its trading band for the 10-year JGB yield, effectively removing its current +25 bps target, but the economic outlook has since weakened, effectively removing this option, MNI understands. (See MNI INSIGHT: BOJ May Consider 10-Yr Yield If Yen Hits 125 Fast) The yen traded as low as 121.41 on Tuesday, the weakest since 2016, and versus levels of around 115 at the end of last year, as the greenback surged in the wake of increasingly hawkish signs from the Federal Reserve. (See USDJPY TECHS : Bulls Remain In Control)

DOWNSIDE RISKS

Nor is there any possibility that the BOJ could indicate a potential increase in its long-term policy interest rate without being sure that the economy is recovering, core consumer price inflation is stable above 1%, and wages are rising at a rate of about 2%. Instead, downside risks to economy are growing as soaring energy costs following Russia’s invasion of Ukraine worsen the terms of trade and domestic demand weakens.

Kuroda has dismissed any suggestion that the BOJ will unwind easy policy to address cost-push inflation or the weak yen.

But, with an election for the upper house of parliament due in the summer, the government has indicated it is willing to take action to ease the impact of higher commodity prices.

BOJ officials have been stung in the past by criticism from politicians who accused them of moving too quickly to reduce stimulus, and may now be waiting for other central banks, and particularly the European Central Bank, to take the lead in tightening before making any move themselves, MNI understands.