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The Bank of Japan has driven the yen towards a multi-decade low, defying a global shift towards higher interest rates and vowing to keep bond yields at zero.
Within minutes of the BoJ’s policy decision on Thursday, the yen fell to ¥129.88 against the dollar as the central bank promised to conduct daily operations in defence of its “around zero” target for 10-year bond yields.
With the US Federal Reserve set to begin raising rates rapidly, the BoJ’s decision to stand fast will exacerbate a global divergence in yields that has pushed the yen to its lowest level since the early 1970s in real terms.
The BoJ believes Japan’s underlying economy is too fragile to tighten monetary policy, but it risks upsetting politicians and the public as the weak yen drives up the price of imported goods.
“The BoJ did not just reaffirm its dovish stance, it doubled down on its defence of yield curve control by committing to daily purchases of [bonds] — this effectively turbocharges the policy divergence narrative,” said Benjamin Shatil, FX strategist at JPMorgan in Tokyo.
The BoJ kept overnight interest rates on hold at minus 0.1 per cent. It said it would conduct daily purchases of 10-year bonds at a yield of 0.25 per cent, showing no willingness to let bonds trade in a wider band.
The yen’s slide to a 20-year low was consistent with what currency traders said was the currency’s “vulnerability” under the BoJ’s current policy.
The drop on Thursday brought the yen closer to ¥130 against the dollar, which currency traders described as a potential “line in the sand” for policymakers that could trigger verbal intervention to prevent the currency’s slide from becoming too steep and sudden.
In its quarterly outlook, the central bank said Japan’s economy was “expected to be under downward pressure” from a rise in commodity prices owing to the Russian invasion of Ukraine.
The BoJ revised its forecast for inflation upwards from 1.1 per cent to 1.9 per cent for the fiscal year to March 2023, reflecting the shock from commodity price increases.
Risks to prices are skewed to “the upside for the time being, mainly reflecting uncertainties over energy prices”, it said, “but are generally balanced thereafter”.
Source: This post first appeared on Duk News
