“If a weak yen pushes up inflation and at the same time causes companies to significantly raise wages, then the central bank will do its part by raising rates more aggressively.” Japanese central bank governor Kazuo Ueda is currently reluctant to raise interest rates. Also due to public debt at 250 percent of gross domestic product, Tokyo does not intend to change its monetary policy for now, but the markets are watching the phenomenon of the moment with mixed interest and concern: the fall of the Yen.
The Japanese currency, the third most important after the dollar and the euro and generally considered a safe haven by investors despite the historic accommodative policy of the Japanese financial authorities, has been on a rollercoaster for days, depreciating to the point of breaking through the threshold of 160 per dollar, record for 34 years now, the lowest value since April 1990 on the greenback, and at 171 on the euro, the lowest since 1999. The yen then returned to recover some points, despite at the end of the monthly meeting of the Policy board , the Bank of Japan announced its decision to keep its monetary policy unchanged, despite the openness shown in recent weeks with the first increase in interest rates in the last 17 years.
The nine members of the council, with a unanimous vote, opted to maintain the rate policy at around 0.1%, keeping the volume of purchases of long-term government bonds at 6 trillion yen per month (around 37 billion euros ). In the report on the country’s economy, also released today, the BoJ increased the growth projection for the main consumer price index in 2024, bringing it to 2.8% compared to the previous forecast of 2.4%. , and to 1.9% from 1.8% for the year 2025.
“We consider the devaluation of the yen against the dollar to be excessive, driven essentially by speculative maneuvers, and the government will continue to monitor the current volatility in the foreign exchange market,” Japanese Finance Ministry official Masato Kanda told local media. The last time the Japanese authorities conducted a yen-buying and dollar-selling intervention to curb the yen’s decline was in October 2022, an operation which based on the numbers communicated by the BoJ on monetary transactions carried out between intermediaries, cost the Tokyo government around 5,000 billion yen, equivalent to more than 30 billion euros.
Japanese officials dodged questions about moves underway to counter the yen’s fall. Certainly, Kanda said, Tokyo is ready to “deal with foreign exchange issues around the clock.” With an enormous public debt that would make the Italian one smile, equal to over 250 percent of GDP, Japan is having a hard time raising interest rates due to the consequences it could suffer and the greater costs to be incurred to refinance sovereign bonds at higher prices. But this does not mean that he does not have other weapons at his disposal, nor various factors that play on his side. The fundamentals of its economy remain solid: it has foreign exchange reserves amounting to 1.2 trillion dollars, a constant current account surplus, a net foreign position of three and a half trillion dollars, overall contained inflation, and a public debt which, although colossal in size, is held in its own currency largely by public or semi-public institutions.
The weapons available, as mentioned, are numerous. And according to what was reported by the Reuters agency, it seems that the Government has resorted to one of these, also given the recovery of the currency in the last few hours. In fact, data on the money market suggest an intervention by the Ministry of Finance to support the currency, with spending of around 35 billion dollars to purchase yen.
In other words: despite the authorities’ elusive responses, signs indicate that the Government bought several yen on the market on Monday to strengthen the currency, and on Wednesday – it usually takes two days to settle monetary transactions – signs of this should be seen .
The Government attributes the fall of the currency to speculative maneuvers. In particular to the carry trade of various investors who take out loans in depreciated yen to purchase currencies with far higher yields, such as dollars and euros, given the diametrically opposed policies adopted by the Federal Reserve and the ECB compared to the BoJ. What the Japanese authorities care about most at the moment is the defense of the real economy. In fact, a weak currency greatly favors exports but makes imports much more expensive. A similar mainstream case has been seen recently in Russia, hit by sanctions that have sunk the ruble, making it much more complicated for Moscow companies to purchase finished and semi-finished goods from abroad. The Moscow authorities, not having the burden of a huge public debt, but having their hands tied on the currency market due to the blocking of dollar and euro reserves (to be sold to buy rubles) due to sanctions, have brought the reference rates at high levels to counteract the depreciation of the national currency. Japan, where monetary policy is subject to so-called fiscal dominance due to excessive public debt, has therefore made a different choice, no less effective.
“Rising prices of import goods are believed to hit the most vulnerable people and could curb Japan’s momentum towards increasing actual wages,” Kanda said. What seems to be affecting the yen in particular is the carry trade, and which goes hand in hand with the differential between rates which seems destined to continue, given the hypotheses of a postponement of the rate cut by the Federal Reserve due to the inflation still recrudescent in the United States.
In the March monetary policy meeting, the BoJ decided to end negative interest rates for the first time in 17 years and to stop the yield control program (YCC) adopted in 2016. Choices light years away from Washington and Frankfurt where rates they travel in the order of 4 and 5 percent. For governor Ueda, although the 2% target of “healthy” inflation is in sight, financial conditions will remain accommodating and further interest rate increases will depend on developments on the growth front and external factors. The Japanese line is that rates will remain low until the positive effects for businesses on the export front disappear and the negative ones on the import front become apparent.
In the last quarter of 2023, the Japanese economy managed to avoid technical recession with an upwardly revised expansion of 0.1% in the second GDP reading, driven by business investments, and despite weak domestic consumption. According to data from the Ministry of Finance, in the October-December quarter of last year, investment growth was 16.4% compared to the previous year, driven by the innovation process of IT and machinery in the transport sector. This is the eleventh consecutive quarter of growth: a figure that anticipates a possible recovery in domestic demand and a dynamic which, according to analysts, could translate into a progressive increase in consumption between now and the end of the current fiscal year.
Despite the difficulties of its economy, which are nevertheless common to most advanced economies, Tokyo at the moment does not appear to fear the crisis, so much so as to exclude questioning its “atypical” model based on accommodative monetary policy and a continuous program of purchase of sovereign bonds, in spite of a monstrous public debt.
