The recent depreciation of the Japanese yen is primarily attributed to underlying economic fundamentals, according to a senior official at the International Monetary Fund (IMF). The IMF official asserted that the conditions necessitating authorities’ intervention in the currency market are not currently met.
Sanjaya Panth, Deputy Director of the IMF’s Asia and Pacific Department, made this declaration during a press briefing on Saturday, underscoring the significance of interest rate differentials as the driving force behind the yen’s ongoing downward trajectory.
Japan is now grappling with increasing pressure to counteract the persistent weakening of its currency. This decline has been driven by market expectations of enduring high U.S. interest rates while the Bank of Japan maintains its steadfast commitment to ultra-low interest rates.
The IMF’s stance is that foreign exchange intervention is justifiable in specific scenarios, such as when the currency market experiences severe dysfunction, when financial stability risks intensify, or when inflation expectations become dislodged. Panth clarified that currently, none of these circumstances are prevalent.
He referred to Japan’s currency market intervention in September and October of the preceding year as a countermeasure to stabilize the yen’s rapid decline. This marked Japan’s first intervention in currency markets since 1998, with the yen plummeting to a 32-year low of 151.94 against the U.S. dollar. As of Friday, the dollar exchanged at 149.57 yen.
In stark contrast to a host of central banks globally raising interest rates, the Bank of Japan has retained a dovish stance. This is the case despite inflation levels consistently exceeding its 2% target for over a year.
BOJ Governor Kazuo Ueda has consistently emphasized the need for maintaining ultra-low interest rates until inflation can robustly hover around 2%, sustained by robust demand and wage increases.
Panth’s outlook leans towards an upside risk for Japan’s near-term inflation, owing to the economy operating near full capacity, and price increments being propelled by robust demand. However, he cautions that the current conditions do not warrant the BOJ to raise short-term rates, especially given the uncertainty surrounding the potential effects of slowing global demand on Japan’s export-reliant economy.
In the interim, Panth suggests that the BOJ should adopt measures that facilitate greater flexibility in long-term interest rates, laying the groundwork for future monetary tightening.
Currently, the BOJ steers short-term rates at -0.1% and maintains a 0% target for the 10-year bond yield under its yield curve control (YCC) policy. In response to mounting inflationary pressures on yields, the central bank has gradually relaxed its grip on long-term rates by raising a de-facto cap for yields in December of the previous year and again in July.
Panth acknowledged these measures as steps in the right direction, asserting, “What it did in December and July to increase flexibility on the long end of the yield curve was very much in line with the right approach.”
