Continuing Depreciation of Yen: Do Not Allow Speculative Currency Market Moves

The yen has further depreciated, and it is shaking the Japanese economy. Excessive fluctuation in the foreign exchange market has a significant negative impact. It is important for the government and the Bank of Japan to take a strong stance against speculative moves.

On Monday, the yen fluctuated wildly in the foreign exchange market. In the morning, the yen plunged to the range of ¥160 per dollar, its first drop to that level in about 34 years, since April 1990. But in the afternoon, the Japanese currency turned around and soared to the ¥154 range.

When foreign exchange intervention is expected to be highly effective, monetary authorities sometimes use “covert intervention” in which they do not immediately announce whether they intervened.

On Tuesday, Masato Kanda, a vice minister of finance for international affairs, continued to avoid making an explicit statement, only saying, “I have nothing to say about intervention.” But there is a widespread view in financial markets that the government and the BOJ carried out a yen-buying, dollar-selling intervention.

If the government and the BOJ judge that there is strong speculative activity, they should respond with firm measures.

The ¥160 range represents a depreciation of nearly ¥20 against the dollar compared to the level at the start of this year. If the currency market fluctuates too much, there are concerns about negative effects, such as it becoming difficult for companies to make business plans.

Kanda has emphasized, “It is hard to overlook that violent and even abnormal fluctuations caused by speculation will have negative impacts on the national economy.”

An excessively weak yen has many adverse effects on the Japanese economy.

Wage increases have not kept pace with inflation. Real wage growth had been negative for nearly two years as of February.

In this year’s shunto spring wage negotiations, many companies responded with the highest level of wage increases in 33 years. However, if the weak yen leads to higher prices due to costlier imports, it may be difficult for real wages to turn positive. If consumption declines, the realization of a virtuous economic cycle will be far from certain.

The main reason for the yen’s depreciation and the dollar’s appreciation is the large difference in interest rates between Japan and the United States — a situation that makes it advantageous to invest in dollars.

The BOJ left its policy rate unchanged at around 0% to 0.1% last week. The Federal Reserve Board, on the other hand, is expected to maintain its rate at 5.25% to 5.50% this week, and the yen is expected to remain under downward pressure. The government and the central bank need to remain vigilant on market movements.

Although the BOJ lifted its negative interest rate policy in March, it has indicated that it intends to continue monetary easing on the grounds that the underlying trend of price inflation has not yet reached 2%. Is the BOJ not overly emphasizing this inflation target, thereby contributing to the yen’s depreciation?

The weaker yen has an effect of boosting the underlying price trend. The BOJ should carefully analyze the impact of the yen’s depreciation on the economy and price trends, and apply this analysis to its future policy management.

(From The Yomiuri Shimbun, May 1, 2024)