While the Federal Reserve marches toward higher rates, Japan keeps insisting the prospect is a non-starter at home. As a result, the yen has weakened dramatically against the dollar, falling more than 2% Monday and sliding to a seven-year low. It’s been the worst-performing major currency since late December.
None of this seems to bother Bank of Japan’s Governor Haruhiko Kuroda, who said a weaker yen is fine by him. Markets are taking him at his word. Still, Japanese government bonds haven’t been immune from the global rout as inflation surges. Yields have climbed, albeit from a very low base, to touch the BOJ’s ceiling. (Japan’s policy of yield curve control aims to keep 10-year government bond yields around zero with 25 basis points of wiggle room.) To cap the rise, the central bank stepped in twice on Monday, offering to buy an unlimited amount of bonds at a fixed rate — and will repeat the exercise over several days this week. Kuroda appears to be bracing for a prolonged tussle with investors. Such actions keep rates in check, but also emphasize the central bank’s dovish nature. Its stance will, in turn, keep downward pressure on the yen, which slid past 125 per greenback Monday before paring some losses. The currency may even hit around 150 per dollar, according to Societe Generale SA, the softest level since 1990, and weaker than when the U.S. intervened in the foreign-exchange market with Japanese authorities to prevent a collapse in 1998. The cause back then was a rupture in the domestic banking system, which was saddled with soured loans following the bursting of a property bubble at the start of the decade. That was a bad yen decline. Far from worrying about the current moves, though, Kuroda appears to have embraced them, telling lawmakers Friday that it could be advantageous. Call this a good decline.
Kuroda is right that the news isn’t all terrible. A weaker currency tends to push up inflation, a goal of the BOJ under a string of governors. The pace of price increases in Tokyo rose by the most in two years this month, the government reported Friday. It’s conceivable that inflation will climb to 2% in April, according to Bloomberg Economics, hitting the BOJ’s target — a rare feat. There will be no champagne, however: The cost will be born by consumers, whose spending is vital for a more sustained recovery. Surging energy prices are behind much of the spike in the cost of living.
While faster inflation brings one policy goal closer, it makes another look more distant. Growth still needs to be nursed after prolonged on-off lockdowns to combat Covid-19. While gross domestic product bounced last quarter after a contraction in July to September, the gain was well short of forecasts. Economists predict another retreat in the first three months of this year. It’s vital that consumers get out and spend as restrictions ease. Yet the spurt in prices risks doing the opposite: About 85% of respondents in a survey by Jiji Press, a Japanese news service, said increases in gasoline and daily necessities are affecting their standard of living. Starbucks is lifting Japanese prices for the first time in 16 years.
Kuroda seemed aware of such dangers in a Dec. 23 speech, in which he extolled the general benefits of a weaker yen, but conceded it wasn’t an unqualified positive. “A quantitative analysis by the Bank’s staff shows that the effects of the yen’s depreciation in terms of pushing up prices of durable goods have increased in recent years,” he said in the address to the Japan Business Federation. “Accordingly, the yen’s depreciation might have an increasing negative impact on household income through price rises.”
For consumers who have grown accustomed to headlines about stagnant prices and the perils of deflation over the past few decades, the current moment must be jarring. Kuroda and top officials have long complained about a “deflationary mindset” that’s held Japan back, despite years of ultra-cheap money and seemingly limitless fiscal stimulus. It’s been at least a generation since policy makers have grappled with the consequence of anything remotely close to an inflationary mindset. It’s one thing to desire a weak yen, it’s another to have a persistently weakening yen. In such an environment, policy making becomes defensive and is always scrambling to catch up.
Prime Minister Fumio Kishida’s government is stepping in with a stimulus package to alleviate the burden on households. The Sankei newspaper last week put the package at more than 10 trillion yen ($800 billion). That will alleviate some short term strains, but won’t prevent the yen from weakening nor reduce Japan’s dependence on imported oil, which has left it very vulnerable in the wake of Russia’s invasion of Ukraine.Kuroda can’t push energy prices down, but he’s no innocent bystander, either. He dug in his heels with his categorical statements. If the governor becomes more equivocal, it will trigger speculation that the heart of the BOJ’s approach — quantitative easing and yield-curve-control — is negotiable. He won’t want to do that without an alternative ready. Over the past few years, shifts have tended to be cloaked in policy reviews that can take weeks or even months. Such announcements buy time, but they also increase pressure to unveil something markedly different from the status quo. Kuroda might have wished for an easy glide path to the end of his second term in April next year. Hitting the inflation target, long a holy grail of policy, might turn out to be the least of his problems.
More From This Writer and Others at Bloomberg Opinion:
• The Magical Land of Low Inflation and No Rate Hikes: Daniel Moss
• What a Time for Japan to Matter to Markets Again: John Authers
• Why Bonds Losing $2.6 Trillion Is Welcome News: Aaron Brown
(Updates first and third paragraphs with market moves.)
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously he was executive editor of Bloomberg News for global economics, and has led teams in Asia, Europe and North America.
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