MNI INTERVIEW 1: Tighter Fed Could Push Yen To 110-Ex-BOJ Exec

Investors spooked by Fed (signals of higher rates) could push the yen to as strong as 110 against the dollar, a former Bank of Japan chief economist and executive director told MNI, adding that the BOJ would be unconcerned by a temporary end to the recent period of yen depreciation.

“The dollar has weakened because of adjustments to stock prices. Bigger adjustments may happen, strengthening the yen further,” Kazuo Momma, now executive economist at Mizuho Research and Technologies, said in an interview.

“The negative impact of a weak yen is under discussion now in Japan. There is the risk that the dollar weakens to JPY110. A weaker yen is regarded as problem, so JPY110 is not problem for Japan and may be welcome to the BOJ,” he said, (see: MNI BRIEF: BOJ Kuroda Says Weak Yen, Easy Policy Good For Econ.)

A period of yen depreciation from late last year prompted BOJ Governor Haruhiko Kuroda to stress that a weaker currency can aid the economy so long as the exchange rate remains tied to fundamentals, but officials at the central bank have been concerned that the government could become uneasy if it fell too far. (see: MNI INTERVIEW: BOJ Unruffled On Yen, Eyes Govt Reax If 120 Hit.)

(See: MNI INTERVIEW 2: Downside Risks To BOJ's '23 Price View-Momma)

BRACE FOR IMPACT

The Fed will have to balance the need for rate hikes with the imperative to preserve market stability, Momma said, adding that while U.S. inflation may have peaked the economy may still be on course to grow too quickly.

“I think an economic slowdown to around 3% is necessary for U.S. inflation rate to fall to an appropriate level. The focus is whether the U.S. economy will slow down autonomously, and the economy will move toward a soft-landing,” Momma said, after the (International Monetary Fund) this week lowered its U.S. economic growth forecast to 4.0% from 5.2% in October.

“The focus is how the Fed assesses the recent stock moves and their impact on the economy, and how the Fed sees the impact of accelerating rate hikes on financial markets, he said. “If the Fed sees the need to forcibly slow the economy, the number of rate hikes will become bigger," he said.

“But the Fed should not surprise markets and ... must balance rate hikes with market stability.”