Why the Yen Has Weakened and What Japan Is Doing About It
The Bank of Japan stands out among major central banks with its commitment to maintain rock-bottom interest rates.
(Bloomberg) -- The Bank of Japan stands out among major central banks with its commitment to maintain rock-bottom interest rates to boost a moribund economy, even as surging inflation worldwide spurs the U.S. Federal Reserve to roll back stimulus and raise rates. As a result, the yen has weakened dramatically, hitting a 20-year low against the dollar in April. While BOJ Governor Haruhiko Kuroda has said he’s not bothered by a weaker yen, Japan’s government bonds haven’t been immune from the global rout spurred by rising prices. That’s putting extraordinary strain on a BOJ policy known as yield curve control.
1. What’s a yield curve?
It’s a way to show the difference in the reward investors get for choosing to buy shorter- versus longer-term debt. Most of the time, they demand more for locking away their money for longer periods, with the greater uncertainty that brings. So yield curves usually slope upward.
2. What’s the difference in Japan?
Normally market forces determine the yield curve. The BOJ takes a more hands-on approach. Its policy of yield curve control, adopted in 2016, aims to keep 10-year government bond yields around 0% with a quarter of a percentage point, or 25 basis points, of wiggle room either side -- part of its effort to flood the economy with cheap money to try to revive growth. But its control came under tremendous pressure this year because the Fed started raising interest rates, prompting investors to speculate that Japan would follow suit, meaning it would allow the yield to go higher.
3. What’s the BOJ’s response?
The bank has intervened aggressively in the market to keep a lid on the yield. It conducted a four-day unlimited buying spree of government bonds at a fixed rate of 0.25% at the end of March. As a result, 10-year yields eased back to 0.21% on March 30, according to data compiled by Bloomberg. When the yields rose again in April, it announced another round of unscheduled bond purchases. The bank has used fixed-rate buying several times before, including purchases of 1.6 trillion yen ($13 billion) on July 30, 2018, but never for such a sustained period.
4. Why is the yen so weak?
The biggest reason is the move toward higher interest rates in the U.S., which makes dollar-denominated assets more attractive for investors seeking higher returns. The so-called real yield -- meaning adjusted for inflation -- on benchmark 10-year Treasuries climbed above zero in April for the first time in more than two years, as bond markets moved toward pre-pandemic normality. The actual, or nominal yield on 10-year notes climbed toward 3% -- the highest since 2018 -- as traders continued to bet on an aggressive series of rate hikes from the Fed. Other factors include the strength of the U.S. economy and its labor market while Japan continues to lag behind its peers. Japan’s trade balance staying in the red is also likely feeding into the weaker yen.
5. Why doesn’t Japan raise rates?
Kuroda -- who famously rattled markets with a surprise shift to negative interest rates in 2016, before settling on yield curve control -- keeps saying that it’s too early to cut back monetary easing and raise rates in Japan, where inflation remains relatively muted. In February, Japan’s benchmark inflation measure was still at 0.6%, far below the BOJ’s 2% target. (The bank could raise its projection for the year to the “upper 1% range” in late April, Bloomberg News has reported.) By contrast, in the U.S. the consumer price index increased 8.5% in March from a year earlier, following a 7.9% annual gain in February. The different stances are helping weaken the yen.
6. What does the weak yen mean for the economy?
Historically Japan has welcomed a weakening of the yen as it helps exporters including carmaking giant Toyota Motor Corp. when they repatriate profits made overseas. In the past decade, former Prime Minister Shinzo Abe ushered in a period of a much weaker yen largely to the applause of the business world. The mood is shifting now though given that costs for commodities and other inputs are rising at the fastest pace in four decades. “There are positive aspects to it, but given the current economic climate, strong negative aspects exist,” Finance Minister Shunichi Suzuki said in mid-April, referring to the hit to the bottom lines of businesses that can’t pass rising costs on to customers. He added, however, that it was up to markets to decide currency rates. The average household is also feeling the bite from higher prices for imports from energy to food. With the central bank unlikely to budge, Prime Minister Fumio Kishida is left trying to temper the impact through government spending, such as fuel subsidies.
7. Could the government intervene?
So far Suzuki has stuck to expressing concern and has refrained from mentioning the possibility of direct intervention in the currency market. But he has been ramping up his language in tandem with the speed of yen losses. If the government does intervene to strengthen the yen, it would be the first time since 1998, when it and the U.S. joined in a massive coordinated yen-buying spree. Any one-sided moves from Japan this time would likely trigger some form of protest from the U.S. side. Japan’s chief currency official said in March he’d discussed the foreign exchange as a major issue with his U.S. counterpart.
8. Where does this leave Kuroda?
It’s an awkward way to spend the last year of his second five-year term as governor. But he’s shaken off any concerns about the negative side effects of a weaker yen, sticking to protecting the credibility of his policy framework. Kuroda often points out it’s the finance ministry, not the BOJ, that is in charge of foreign exchange matters. What happens after Kuroda leaves in April 2023 is another matter. Kishida may choose a successor who takes a more conventional line on policy.
The Reference Shelf
- More QuickTakes on Japan’s experiment with ‘Abenomics,’ on ‘Japanification’ and how Covid-19 brought back negative rates.
- Bloomberg Opinion’s Daniel Moss on the yen’s plunge, and John Authers on how Japan has become relevant again in an era of war and inflation.
- Yuki Masujima at Bloomberg Economics says Japan’s recovery is likely to be delayed.
- Bloomberg Markets took a look at Kuroda’s long tenure.
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