The Japanese yen is hovering near its weakest level since 1998 and authorities have hinted at action to stem the currency’s decline.
Ahead of the Bank of Japan’s interest rate decision later this week, CNBC will look at whether the Japanese central bank can move from its extremely loose monetary policy, as the Reserve The Federalist maintains a hawkish stance, signaling more aggressive rate hikes to come.
The widening exchange rate differential has caused the yen to weaken significantly, with Japan’s local currency down about 25% year-to-date.
Last week, the Bank of Japan conducted a foreign exchange “check”, according to the daily Nikkei — a move largely seen as preparation for official intervention.
The so-called check, as Nikkei explains, involves the central bank “inquiring about trends in the foreign exchange market” and is seen by many as a precursor to physical intervention to protect the yen.
Despite talk of a physical intervention in the foreign exchange market, analysts point to another reason behind the yen’s weakness: the Bank of Japan. return curve control (YCC) policy – a strategy implemented in 2016 that limits the yield on 10-year Japanese government bonds to 0% and offers to buy an unlimited number of government bonds to protect the potential 0.25% limit around the target.
The yield-curve control policy is aimed at bringing inflation in Japan back to the 2% target level. On Tuesday, Japan reported that core inflation rose 2.8% from a year ago in August, the fastest growth in nearly eight years and the fifth consecutive month that inflation exceeded its target. BOJ.
“Protecting this policy will be a priority for the central bank rather than currency intervention, which will be decided by the Treasury Department,” said Joey Chew, Senior FX Strategist for Asia at HSBC. and by the Central Bank of Japan.
“The BOJ will conduct bond purchases – theoretically unlimited – to maintain its yield-curve policy,” said Chew, adding that such monetary activity would be somewhat at odds with any potential foreign exchange action, as the sale of the dollar-yen would tighten the liquidity of the Japanese local currency.
“The discussion of FX intervention at this point is unlikely to have a significant impact,” said Chew. “Even actual intervention can lead to only a large but short-lived response.”
Chew pointed to limitations from previous instances when Japan was involved in defending its currency.
Strategists at Goldman Sachs also don’t see the central bank shifting from its yield-curve policy, only to its hawkish global peers.
“Our economists expect the BOJ to remain firmly committed to YCC policy at this week’s meeting as the other five G10 central banks are all likely to raise major interest rates,” they said. know in a note.
Goldman Sachs said that while it was more likely to intervene directly with reports of rate checks, economists found the chances of success in defending the yen were “even lower.” “
Monetary policy changes by the Japanese authorities are unlikely, the chances are particularly low under BOJ governor Harukiho Kuroda, UBS Chief Economist for Japan Masamichi Adachi said.
“One possibility they will offer is to modify its current neutrality guidance to dovish to just neutral or remove it,” he said, adding a maximum probability of 20% to 30%.
According to Nomura, one of the first indicators of a shift in Japan’s monetary stance will be a departure from Prime Minister Fumio Kishida’s predecessor Shinzo Abe’s economic policy, commonly known as Abenomics.
Naka Matsuzawa, Chief Japan Macro Strategist at Nomura, said: “The necessary first step towards normalization is for Prime Minister Kishida to show that his policy priorities have differed from those of Abenomics, and he It will not suffer any more price declines.”
The Bank of Japan’s next two-day monetary policy meeting ends on Thursday, a day after the US Federal Open Market Committee meeting, where officials are expected to raise interest rates by 75 basis points.