MNI POLICY: Weak Yen A Factor As BOJ Considers Policy Shift

Some Bank of Japan board members now believe their outlook report’s median forecast for core-core consumer price inflation of 1.8% in fiscal 2025 is sufficient to achieve their 2% target, with yen weakness fueling concerns over future price rises, though many members still want to ensure price and wage momentum is sustainable before raising interest rates, MNI understands.

While the BOJ does not target the exchange rate, the weaker yen could add to arguments for adjusting real interest rates with some officials concerned that the Bank could fall behind the curve on inflation. The BOJ is already considering dropping yield curve control by April should wage gains persist, with an increase in overnight rates from negative levels possible as a prior measure. (See MNI POLICY: Short-Term Rate Hike Under YCC One BOJ Scenario)

The real short-term rate is estimated at about -1.8%, while the long-term real rate is about -0.7%, the BOJ has stated. The yen has depreciated by about 15% against the dollar since January and was trading at 147 earlier on Wednesday.

WEAK YEN

However, the Bank remains steadfast in its determination to meet its 2% price target before abandoning easy policy, and many Board members still want to ensure price rises and wage hikes are sustainable before acting on interest rates. Still, the BOJ stands ready to adjust real interest rates before the price target is met, and officials are focused on upside risks to prices following prolonged pass-through of cost hikes and an increasing probability of wage hikes next year. (See MNI POLICY: April YCC Removal Window Possible On Wage Data)

BOJ targeting of the weak yen is not without precedent, despite currency intervention falling under the jurisdiction of the government and the Ministry of Finance.

Governor Kazuo Ueda has stated that the BOJ’s December 2022 and July 2023 decisions were partially aimed at addressing foreign exchange volatility.

But officials are also aware that rapid rate hikes would sharply increase the financial burden for businesses and households as well as for the government, undermining foundations for sustainable economic recovery.

Japanese authorities will closely watch the U.S. Federal Reserve’s policy decision next week and its impact of the yen.