MNI POLICY: Weak Yen Adds To Pressure For Yield Curve Move

Persistent yen weakness would add to political pressure on the Bank of Japan to further loosen its yield curve control framework later this year, MNI understands.

While the Bank does not target the exchange rate and would be wary of being seen to do so, it does monitor its effect on inflation. Possible responses could include raising the effective cap on 10-year bond yields from 1.0% or suspending daily fixed-rate bond purchases.

The update to medium-term growth and inflation projections in October’s Outlook Report would provide a possible opportunity for action, though continuing yen depreciation would concern the government and could prompt consideration of a move at the BOJ’s Sept. 21-22 meeting, after officials have seen the results of the Federal Reserve’s Sept 20 decision. (See MNI INTERVIEW: BOJ Could Raise YCC Limit Again In 2023-Sekine)

Direct intervention in currency markets, as occurred last year when the yen reached 145 to the dollar and then at about 152, would be decided by the Finance Ministry, but any such move would be expensive and its effectiveness limited by rising U.S. interest rates as the Federal Reserve continues to attempt to reduce inflation.

CHINA FEARS

The yen traded at around 145.4 to the dollar in Tokyo on Friday after reaching a nine-month low of 146 on Wednesday.

The BOJ is unlikely to use its daily operations in response to a weak yen, such as by reducing bond purchases to push up yields.

In July the Bank raised its 10-year yield upper limit to 1% from 0.5%, as the prospects for reaching the inflation targets improve. At the time Governor Kazuo Ueda said the BOJ aimed at limiting market volatility as much as possible, including in foreign exchange.

The Bank is also increasingly concerned by China’s economy, as its depressed property market continues to deteriorate, posing a potential downside risk to Japan’s exports and price outlook. While BOJ officials calculate that China has plenty of room for monetary and fiscal policies to support its economy, they expect property market woes to persist for some time.