Governor Kazuo Ueda of the Bank of Japan hinted on Wednesday that the central bank could take monetary policy action if the yen‘s persistent depreciation begins to significantly impact prices. This statement marks the strongest indication yet that further interest rate hikes could be on the horizon.
Finance Minister Shunichi Suzuki also expressed “strong concern” on Wednesday regarding the adverse effects of a weakened yen, such as increased import costs. He reiterated Tokyo’s readiness to intervene in the market to support the flagging currency.
These remarks, following a meeting between Ueda and Prime Minister Fumio Kishida on Tuesday, underscore the government and central bank’s commitment to collaborating in curbing detrimental yen depreciation.
Ueda emphasized the need to be vigilant about the risk posed by currency volatility on inflation, particularly as businesses show a growing inclination to raise prices and wages. He stated to parliament on Wednesday, “Exchange-rate movements could significantly impact the economy and prices, so there is a possibility that we may need to respond with monetary policy.”
This statement contrasts with Ueda’s remarks after the BOJ’s policy meeting on April 26, where he stated that recent yen depreciation had not immediately affected trend inflation. Some traders interpreted Ueda’s post-meeting comments as heightening expectations that the BOJ would delay raising interest rates from the current level around zero.
“The BOJ aims to avoid the perception that it could be compelled to hike rates to address the weak yen. However, it also recognizes the need to acknowledge the economic ramifications of yen depreciation,” explained Izuru Kato, chief economist at Totan Research.
Following the yen’s plunge to a 34-year low of 160.245 per dollar on April 29, Japanese authorities are suspected to have intervened in the market last week, reportedly spending over 9 trillion yen ($58.4 billion) to support the currency.
On Wednesday, the dollar edged up to 155.20 yen from approximately a one-month high of 151.86 on May 3.
Ueda reiterated the central bank’s stance that it would “adjust the degree of monetary accommodation” if trend inflation moves closer to its 2% target, as projected last month. He also indicated that the BOJ might not necessarily wait for inflation to reach the target before raising rates.
“If trend inflation appears to accelerate as projected, we will adjust the degree of monetary accommodation accordingly,” stated Ueda, implying the possibility of near-term rate hikes and multiple stages of increases in the coming years.
Many market participants anticipate the BOJ to raise interest rates again this year, following its cessation of negative interest rates and other unconventional stimulus measures in March.
Speaking in the same parliamentary committee, Finance Minister Suzuki affirmed that authorities were prepared to utilize “all means available” to address excessive yen depreciation that harms households and businesses by inflating import costs. He also mentioned that authorities were not considering specific yen levels in determining whether to take action and refrained from commenting on what he deemed as excessively volatile movements.
