Lake Kihara
STRESA, Italy (Reuters) – Japan renewed efforts to counter the yen’s excessive fall during a weekend meeting of Group of Seven (G7) financial leaders after a recent rise in bond yields to a 12-year high failed to slow the currency’s stubborn decline. .
The efforts by the government and central bank highlight the dilemma facing policymakers as they try to balance the need to stem a sharp fall in the yen that is hurting consumption while keeping borrowing costs low to prop up the fragile economy.
Following lobbying from Japan, G7 finance ministers reaffirmed their commitment to caution against excessive exchange rate volatility in a communiqué issued after their meeting in Italy on Saturday.
The agreement came after Japan’s top currency diplomat Masato Kanda floated the possibility of resuming intervention in the foreign exchange market on Friday, telling reporters that Tokyo was ready to act “at any time” to counter the yen’s excessive movements.
“If there are overly volatile moves that have a negative impact on the economy, we need to take action and it will be justified,” he said.
Bank of Japan (BOJ) Governor Kazuo Ueda, who also attended the G7 meeting, signaled that soft consumption or rising bond yields would not prevent monetary policy from normalizing.
Ueda said on Thursday that the decline in gross domestic product in the first quarter did not change the Bank of Japan’s view that Japan’s economy is on track for a moderate recovery. Analysts say the Bank of Japan is likely to raise interest rates in the coming months if the economy moves in line with its forecasts.
He also refrained from speaking out against the recent rise in yields to a 12-year high, which was driven in part by market expectations that the Bank of Japan will soon begin a full-scale reduction in bond purchases.
“Our core position is that long-term interest rates should be set by the markets,” Ueda said Saturday when asked about the recent rise in long-term rates in Japan.
The announcements follow a flurry of aggressive signals from the Bank of Japan, which has raised market expectations for a near-term rise in interest rates or a reduction in its large bond purchases.
Ueda ruled out the possibility of using monetary policy to influence the yen’s movements. But he stepped up his rhetoric against the impact of a weak yen on inflation after the currency’s decline led to proposed government interventions to buy the yen on April 29 and May 2.
A Reuters poll showed many analysts forecast the Bank of Japan will raise rates in either the third or fourth quarter of this year.
DATA CLOUDS: PERSPECTIVES
Ueda also signaled the Bank of Japan’s willingness to slowly but steadily raise interest rates if inflation sustainably reaches its 2% target in the coming years, as forecast.
But the data is not yet encouraging. Consumption is weak as wage increases have not yet responded to rising living costs.
Inflation in the service sector, which the Bank of Japan closely monitors as a key indicator of underlying price trends, also remains unchanged.
“Services inflation has likely peaked,” said Junichi Makino, chief economist at SMBC Nikko Securities. “It doesn’t look like core inflation will accelerate to 2%.”
With such weak signs in the economy, some analysts are turning their attention to whether the Bank of Japan will cut bond purchases as part of efforts to slow the yen’s fall.
Ueda ruled out using bond purchases by the Bank of Japan as a monetary policy tool after abandoning sweeping monetary easing in March. But markets remain focused on the Bank of Japan’s market operations for clues about when it will begin to taper.
Some analysts expect the Bank of Japan to decide to reduce bond purchases as early as its next policy meeting in June.
Market expectations of a near-term rate cut helped push the benchmark 10-year Japanese government bond yield to a 12-year high of 1.005% on Friday.
However, the rise in yields did not give a significant rise to the yen. It stood at 156.98 per US dollar on Friday, not far from a more than three-week low of 157.19 hit on Thursday.
“While markets seem excited about the possibility of a policy change, the Bank of Japan is likely to be cool about it all,” said Daiwa Securities chief market economist Mari Iwashita, who ruled out the possibility of a rate cut in June.
“Furthermore, there is no guarantee that such actions will be able to stop the fall of the yen.”