The Bank of Japan has driven the yen to a new multi-decade low, defying a global shift towards higher interest rates and vowing to keep bond yields at zero.
Within hours of the BoJ’s policy decision on Thursday, the yen fell 1.7 per cent to ¥130.62 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.
During a press conference on Thursday afternoon, BoJ governor Haruhiko Kuroda said the central bank had not changed its view that a weak yen was positive for the economy.
“But it’s also true that excessive currency volatility would produce greater uncertainty for companies . . . and would be negative for the economy,” said Kuroda.
As the yen has pushed closer to the ¥130 level in recent weeks, a survey of Japanese companies by Tokyo Shoko Research found that an increasing number of industries and companies had begun to see the yen’s fall as negative.
Currency traders have suggested that the yen at ¥130 to the dollar could cross a “line in the sand” for policymakers and trigger verbal intervention to prevent the currency’s slide from becoming too steep and sudden.
But FX analysts have questioned whether the authorities would engage in such an effort, given its low probability of success as long as the BoJ maintains its policy stance.
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”.
Mansoor Mohi-uddin, chief economist at Bank of Singapore, said that the BoJ was unlikely to make any significant changes to its dovish stance until Kuroda retires in April 2023.
“Kuroda has a last chance to set Japan on the path of stable 2 per cent inflation. The BoJ’s stance is thus likely to push the yen to new 20-year lows of between ¥130 to ¥135 against the dollar,” said Mohi-uddin.