The Bank of Japan on Thursday stuck to its dovish monetary policy as the government made a surprise move to intervene in the currency market amid rising inflation and the sharp fall in the yen’s value against the dollar.
Right after the BOJ’s announcement, the weakening of the yen accelerated to breach the key ¥145 line, prompting the Japanese government to give the green light to a yen purchasing intervention for the first time in 24 years. The intervention briefly bumped up the yen’s rate to the ¥140 level.
During a hastily arranged news conference Thursday evening, Finance Minister Shunichi Suzuki addressed the topic of why the government stepped in, saying, “In principle, exchange rates should be decided in the markets, but we cannot tolerate repeated rapid fluctuations by speculative moves.”
Suzuki said the government will closely monitor the situation and will take necessary actions against excessive rate swings.
Asked if Japan carried through with the intervention without cooperating with the U.S., the minister refrained from going into specifics, saying that Japan has been regularly communicating with overseas currency authorities.
He also did not reveal the scale of intervention, but said the move this time resulted in “a certain level of effect.”
The intervention came as a surprise, as many economists have said it would be difficult for Japan to engage in a meaningful intervention, as the impact of such a move by Japan alone is seen as limited and comes with the risk of backfiring. They have also said it would be tough to get Washington on board because the weakening of the dollar will hinder efforts by the U.S. to stave off inflation.
Meanwhile, in a widely expected move, the BOJ announced that it will continue its ultraloose monetary policy that includes setting a short-term interest rate at minus 0.1% and purchasing Japanese government debt to defend the 0.25% cap for 10-year JGB yields.
The Japanese central bank once again manifested its commitment to lean in the opposite direction of the many foreign counterparts that have embarked on a rate hike campaign.
“I believe we won’t be introducing a rate hike anytime soon,” Gov. Haruhiko Kuroda told a news conference after the BOJ policy meeting.
“We have decided to continue the monetary easing after thoroughly discussing what the most effective monetary policy is by analyzing the Japanese economy, price trends and future development in depth.”
Kuroda reiterated the importance of ultraloose policy to sustain Japan’s economic recovery, saying the central bank’s goal is to achieve 2% inflation backed by a healthy cycle of price and wage hikes, not the current temporary cost-push inflation.
“Although the yen’s rate has been dropping, the BOJ again highlighted that the weak yen is not a reason to change course,” said Saisuke Sakai, a senior economist at Mizuho Research and Technologies.
Also, as the sharp rate hike campaign by other central banks has fueled concerns over a slowdown in the global economy, “the BOJ cannot introduce a policy that accepts a rise of interest rates,” which will drag down the Japanese economy as it recovers from the pandemic, Sakai said.
Prior to the BOJ’s announcement, the U.S. Federal Reserve decided to implement a third-straight rate hike of 75 basis points in an effort to contain inflation while signaling that it will continue a hawkish monetary policy for the time being.
“Restoring price stability will likely require maintaining our restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy,” Fed Chairman Jerome Powell told a news conference.
U.S. consumer prices climbed 8.3% in August from 12 months earlier, which is well above the Fed’s 2% target.
The European Central Bank also raised interest rates by 75 basis points earlier this month, the biggest single increase in its history. The Swiss National Bank decided to end its negative policy interest rate at its meeting on Thursday, which leaves the BOJ as the only central bank with negative rates.
The expanding policy divergence between the BOJ and other central banks has accelerated the weakening of the yen’s value, which has plunged by as much as ¥30 this year.
Earlier this month, the yen’s rate hit a fresh 24-year low by breaching the key ¥140 line.
The fast falling yen has increasingly become a headache for the Japanese economy, as it has jacked up import costs on top of high commodity prices, which have prompted a slew of companies to pass on costs to consumers.
Japan’s consumer prices that don’t include fresh food jumped 2.8% year-on-year in August, the fastest pace in 31 years excluding the impact of sales tax hikes.
Due to the precipitous drop, the government has been more alert and hinting at the possibility of currency market intervention.
But Japan is now eager to take advantage of the yen’s depreciation, as Prime Minister Fumio Kishida announced on Thursday that the country is set to further ease border control measures to welcome more foreign tourists from next month.
Japan will likely remove a daily cap on arrivals, which is currently set at 50,000, and exempt inbound tourists from some 70 countries and regions from the need to obtain visas for tourism.
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