Last week, the USD/JPY rallied to nearly 152.00 to print a fresh 32-year high. The latest leg up in the major was a reflection of the continued divergence in the monetary policy as the Bank of Japan (BoJ) continues to refuse to alter its ultra-easy monetary policy while the Fed aggressively raises interest rates.
It is widely expected that the BoJ will hike its inflation forecasts later this week but maintain its ultra-low interest rates, even after the yen’s unprecedented decline in the recent period. This stance represents a widely different approach to fighting record-high inflation compared to the Federal Reserve and other global central banks that have been tightening their monetary policies.
Raising Inflation Forecasts But Keeping Rates Low
The Japanese authorities have been struggling significantly to curb the yen’s downfall. According to analysts, Japan’s core inflation rate surged to an 8-year high of 3% in September and is expected to stay above the BoJ’s 2% target for the remainder of 2022. High commodity prices and import costs drove the jump in core inflation.
Reuters reported that the BoJ should make minor revisions to its consumer inflation estimates for the fiscal year ending in March 2023 and the following year. Furthermore, the bank is also likely to trim its growth forecasts for the current and upcoming fiscal years due to recession concerns.
In addition to raising inflation forecasts, the BoJ is expected to leave its 0.1% target for short-term rates and the 0% target for the 10-year bond yield unchanged at its Friday policy meeting.
Mari Iwashita, chief market economist at Daiwa Securities, said:
“It’s hard to expect the BOJ to take monetary action to stem the yen’s fall as currency policy falls under the jurisdiction of the finance ministry.”
Some investors believe that the BoJ could make minor changes to its dovish policy due to a lack of public support following the yen’s downturn, but Iwashita argues slight tweaks wouldn’t make a big difference. He added:
“With the Fed determined to combat inflation, a minor policy tweak by the BOJ will do little to narrow the gap between U.S. and Japanese monetary policy.”
In fact, a recent national survey showed that over 55% of respondents believe the BOJ’s dovish monetary policy must be reviewed, while 22% said they wouldn’t make changes, and another 22% said they didn’t know. The poll was carried out by the Mainichi newspaper after BoJ Governor Haruhiko Kuroda reiterated the bank would maintain its current stance despite rampant inflation levels.
The lack of public support for the bank’s monetary policy could worsen Prime Minister Fumio Kishida’s woes, who has been losing support after failing to address his party’s connections with the Unification Church. The poll found that 27% of respondents still support Kishida’s cabinet, down 2% from the previous survey and below the 30% threshold, considered a danger zone.
Bank Of Japan Intervenes Again
Japanese authorities intervened in the foreign exchange market on Oct. 21 for the second time in a month to prop up the beat-up yen, which plunged to a 32-year low against the U.S. dollar.
The policymakers have been making efforts to support the yen after its rapid downfall due to the BoJ’s decision to cling to its ultra-loose monetary policy, widening the gap to the U.S. central bank, which has been delivering major interest rate hikes over the past few months.
Following the dollar’s jump to a 32-year high of 151.94 yen on Friday, Japan’s authorities intervened in the forex market and pushed the greenback down to 144.50 yen. It’s no surprise that most forex brokers were extremely busy on Friday, as the difference between the daily low and high in USD/JPY was nearly 600 pips.
According to Reuters, Japan’s Ministry of Finance (MOF) stepped in several times on Friday. Japan’s Prime Minister Fumio Kishida said:
“We are maintaining our stance of being ready to take appropriate action against excessive forex volatility.”
Masato Kanda, the vice finance minister for international affairs, added:
“We won’t comment now on whether or not we conducted an intervention.”
Kanda added that the MOF would not confirm whether it intervened in the FX market but hinted at a potential “stealth intervention.”
Before this, the MOF stepped in to shore up the yen on Sept. 22, marking Japan’s first intervention since 1998. Kanda and Japanese Finance Minister Shunichi Suzuki have reiterated the government’s willingness to intervene multiple times, citing extreme volatility in the yen.
However, analysts and investors are skeptical about Japan’s capability to shore up the yen on its own, even though the country holds $1.33 trillion in foreign reserves. According to estimates by Japanese brokers, Tokyo purchased a record 3.6 trillion yen ($24 billion) in its September intervention.
Summary
USD/JPY is trading at multi-decade highs on expectations that the BoJ will maintain its very-low interest rates despite the significant depreciation in the national currency. The central bank was forced to intervene several times in recent weeks to boost the yen after it traded against the greenback above 150 for the first time since 1990.