Falling yen could make room for Japan’s central bank to adjust monetary policy

The Bank of Japan’s decision to defend its yield ceiling has drawn criticism from investors, who are betting that the institution may give in to global market forces, opening up little chance of adjusting its monetary policy in the short term.

While few expect the central bank to make a change next Friday to its yield curve control policy, which steers the Japanese 10-year government bond yield around 0%, sharp declines in the yen are making some officials anxious.

The declines have been driven, in part, by the bank’s aggressive efforts to defend an implied 0.25% cap on the 10-year yield target.

Five government officials and sources familiar with the central bank’s thinking say the key to its action at Friday’s meeting could be how far the yen will fall from current 24-year lows and could pose a risk big enough to warrant monetary policy response.

“Central banks do not target exchange rates in the conduct of monetary policy,” said one of the sources. “But the yen has been falling at such a steep pace that it is hurting the economy, which deserves attention.”

A second source echoed this view.

“We expect the Bank of Japan to take some sort of step at Friday’s meeting,” a government official told Reuters, speaking on condition of anonymity.

“It’s hard to think the bank will do nothing when the US Federal Reserve can raise interest rates by 75 basis points.”

Veteran Japanese central bank analyst Naomi Muguruma expects the central bank to maintain its stance on Friday but said the bank could raise its yield cap from 0.25% to 0.50% if the government asks for help to stem declines. yen accents.

Such an increase in the income threshold would be accompanied by a yen purchase intervention by the government.

“This is a risky scenario if the yen continues to fall, and it’s clear that the moves are hurting corporate and domestic sentiment,” she said.

Government expects BC to take “necessary” measures on yen and inflation

In addition to the anonymous source, Japan’s Chief Government Secretary Hirokazu Matsuno said the cabinet expects the central bank to take “appropriately necessary measures” in light of the yen’s recent sharp declines and rising cost of living.

When asked Wednesday about the yen’s decline to a new 24-year low, the government’s top spokesman also reiterated Tokyo’s readiness to take appropriate action on the currency market.

“We hope that the Bank of Japan will continue to coordinate closely with the government and take the necessary measures accordingly,” Matsuno told a news conference.

While the central bank is expected to stick to its ultra-low interest rate targets, it is facing pressure from the stimulus-inclined policy, which is pushing down the yen and increasing the cost of raw material imports.

Expectations of aggressive hikes in US interest rates have raised prospects for widening US-Japan yield differentials, pushing the yen to a fresh 24-year low of 135.58 to the dollar on Wednesday.