Weak yen pressures Bank of Japan interest rate decision

TOKYO, Japan — The weak yen is putting pressure on the Bank of Japan to tighten monetary policy, analysts say, although it is not expected to hike its main interest rate when it wraps up a two-day meeting on Friday.

With the yen at three-decade lows, speculation has grown that Japan’s government could intervene in forex markets to prop up the currency for the first time since 2022.

Early Friday, one dollar bought 155.58 yen, compared with 155.74 the previous day — a level not seen since 1990.

READ: Morning bid: Yen hurtles toward historic low, Fed in focus

A lower yen pushes up the price of imported goods in Japan, so the BoJ could raise its inflation forecasts after Friday’s meeting, analysts say.

If the falling yen creates “an impact too big to be ignored, it means that in some cases a change in monetary policy will become possible”, BoJ Governor Kazuo Ueda said last week.

READ: Bank of Japan ends negative rates, closing era of radical policy

The central bank ditched its negative interest rate policy in March, its first rate increase in 17 years.

Yen’s downward spiral

But BoJ officials suggested there were no more hikes on the immediate horizon, perpetuating the yen’s downward spiral.

Other currencies have also recently tumbled against the dollar after hot US inflation data dimmed hopes for a June rate cut by the Federal Reserve.

So even if the BoJ holds rates steady, any tweaks to its easing program and the tone of comments from Ueda will be scrutinized for hints on future moves.

READ: Japan inflation eased to 2.6% in March

Ueda might want to take a long-term view, but “he may not be able to avoid the forex factor”, said Hideo Kumano, chief economist of Dai-ichi Life Research Institute.

This could cause the bank to move towards an additional rate hike, he said, a view echoed by BNP Paribas and others.

The yen was once regarded as a safe haven, expected to gain in value in times of global turmoil.

However, since Russia invaded Ukraine in February 2022, its value has cratered from levels of around 115 per dollar, fuelled predominantly by the contrast between the BoJ’s ultra-loose policies and rate hikes elsewhere.

In March, Japanese inflation was 2.6 percent, above the BoJ’s longstanding target of two percent.