The Bank of Japan (BoJ) Deputy Governor Ryozo Himino said on Wednesday that the financial and capital markets remain unstable and the Japanese central bank needs to monitor these developments with utmost vigilance.
Key quotes
The financial and capital markets remain unstable.
The BoJ needs to monitor these developments with utmost vigilance.
BoJ also intends to carefully examine the impact these market.
Developments at home and abroad have on the outlet for economic activity and prices, the risks surrounding the outlook, and the degree of confidence in the outlook.
BoJ will adjust the degree of monetary accommodation if it has growing confidence that its outlook for economic activity and prices will be realized.
Will conduct monetary policy as appropriate to achieve the 2% inflation target in sustainable and stable manner while closely communicating with market participants and other stakeholders.
Needs to closely monitor developments in recent market volatilities including weaker stocks and stronger Yen.
BoJ should continue its efforts to refine its approaches to estimate the neutral rate for Japan, and use the results as a useful point of reference.
But BoJ has no other choice but to chart a way forward examining how the economy and prices respond as it conducts monetary policy.
Estimation of the neutral interest rate would not automatically show the right policy path for Japan, at least at the moment.
Our baseline scenario for fiscal year 2025, 2026 envisions a reasonably balanced state where the inflation rate is consistent with the price stability target, and the economic growth is slightly above cruising speed.
The Yen recent appreciation may alleviate the import cost hike and profit squeeze many small and medium-size firms currently face.
But stronger Yen may lower the yen denominated profits of export industries and Japanese multinationals.
Market reaction
At the time of writing, the USD/JPY pair is trading 0.13% higher on the day to trade at 144.15.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.
The BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.