The Japanese yen is near its weakest levels since 1998, and authorities have hinted that they will take steps to stop the currency’s decline.
Ahead of the Bank of Japan rate decision later this week, CNBC takes a look at whether Japan’s central bank could abandon its ultra-loose monetary policy as the Federal Reserve maintains its aggressive stance, signaling rate hikes to come. more aggressive rates.
The widening rate differential has caused the yen to weaken significantly, with the Japanese currency down around 25% year-to-date.
The Bank of Japan reportedly conducted a currency “verification” last week, according to Japan’s Nikkei newspaper, a move largely seen as preparation for formal intervention.
The so-called check, as the Nikkei explained, involves the central bank “inquiring about trends in the foreign exchange market” and is widely seen as a precursor to physical intervention to defend the yen.
Although there is talk of physical intervention in the currency markets, all analysts point to another reason behind the weakening of the yen: the Bank of Japan’s yield curve control (YCC) policy, a strategy that implemented in 2016, which limits the Japanese government to 10 years. bond yields of around 0% and offers to buy an unlimited amount of JGB to defend an implied 0.25% cap around the target.
The yield curve control policy aims to bring inflation in Japan to a 2% target. On Tuesday, Japan reported that core inflation rose 2.8% from a year earlier in August, the fastest growth in nearly eight years and the fifth month in a row that inflation exceeded the BOJ’s target.
HSBC Senior Asia FX Strategist Joey Chew said defending this policy would be the central bank’s priority rather than currency intervention, which would be decided by the Finance Ministry and carried out by the Bank of Japan.
“The BOJ will make theoretically unlimited bond purchases to maintain its policy of controlling the yield curve,” Chew told CNBC last week. He added that such currency operations would be somewhat contradictory to any potential FX action, as dollar and yen sales would tighten the Japanese currency’s liquidity.
“Talk about FX intervention at this point may not have a material impact,” Chew said. “Even actual intervention can only lead to a large but short-lived reaction.”
Chew pointed to the limitations of previous instances when Japan stepped in to defend its currency.
Strategists at Goldman Sachs also don’t see the central bank changing its yield curve control policy, pointing to hawkish global peers.
“Our economists expect the BOJ to remain firmly committed to YCC policy at this week’s meeting against a backdrop of five other G10 central banks likely to make large rate hikes,” they said in a note earlier this week. .
Goldman Sachs says that while direct intervention should be more likely with reports of rate controls, economists see the chance of a successful operation defending the yen as “even lower.”
End of Abenomy
Monetary policy changes by Japanese authorities are unlikely, the chances especially low under BOJ Governor Harukiho Kuroda, UBS chief economist for Japan Masamichi Adachi told CNBC last week.
“One chance that they would make it is to modify their current neutral to make the forward-facing more moderate to just neutral or remove it,” he said, adding that the chance is at most 20% to 30%.
One of the first indicators of a change in Japan’s monetary stance would be a move away from the economic policy of Prime Minister Fumio Kishida’s predecessor, Shinzo Abe, widely known as Abenomics, according to Nomura.
“The necessary first step towards normalization would be for Prime Minister Kishida to show that his political priority has now shifted away from Abenomics, and he will no longer tolerate further yen depreciation,” Naka Matsuzawa, chief Japan macro strategist at Nomura, said last week. .
The Bank of Japan’s next two-day monetary policy meeting wraps up on Thursday, a day after the US Federal Open Market Committee meeting, where officials are expected to raise interest rates by another 75 points. basics.