Yen Pays the Price for Diffident Bank of Japan

Japan's prime minister insists that after giving the Bank of Japan some early advice, he's getting out of the interest-rate business. The central bank can do what it wants, suggests Shigeru Ishiba. The problem is that the BOJ doesn't seem to know quite what it desires — and the yen is paying the price.

After a stunning third-quarter rally, Japan’s currency is again retreating: It’s down about 4% against the dollar this month and approaching levels where the government intervened in markets earlier this year to stem the decline. Traders are speculating when, not whether, the Ministry of Finance will again become an active buyer. The worst was supposed to be behind the yen, as I wrote in September.

It's worth considering what gave the yen such a boost, aside from several carefully timed purchases by the state, and whether those factors have the same potency today. The currency's strength in July to September rested on two drivers: surprising hawkishness from the local monetary authority and the Federal Reserve's pivot to rate cuts. While most economists predict further withdrawal of stimulus from the BOJ, Governor Kazuo Ueda and fellow policymakers have lately stressed a slowly-does-it approach. The new tone may represent a substantive shift rather than another communications misstep of the kind that has plagued the bank in the Ueda era. 

For the BOJ, it's more about what hasn't been said. The surprise hike on July 31 was accompanied by a plan to slash bond buying, as well as some pretty vigorous forward guidance. Japan's economy didn't have to exceed forecasts to warrant additional tightening, it merely had to perform as officials expected. Given that the big gap in borrowing costs between Japan and pretty much anywhere else, especially the US, this was a recipe for considerable yen strength. 

So when Ueda omitted the prior guidance at the following monetary conclave in September, it was notable. The governor then suggested that litmus tests for additional increases would include the health of the global economy, principally America. While this is a reasonable thing to say, it looked like Ueda was getting cold feet. If so, why? The yen is a good place to look: It was coming off a good couple of months, compared with July, when it touched 160 per dollar, the weakest level in a generation. 

There have been numerous instances since Ueda became BOJ chief in early 2023 when his rhetoric has evolved along with the yen. One such occasion was in May, when he left a meeting with then-Prime Minister Fumio Kishida talking tough about the impact of the exchange rate on inflation. We are familiar with the way inflation objectives, often with 2% in there somewhere, have become fashionable around the world since the late 1990s. But what about currency targeting? That is much rarer. Although Ueda & Co. would wince at the tag, their actions leave them open to the charge.

Dollar strength is playing a role. The greenback has advanced against the euro, British pound and Canadian dollar as bets on a further large rate reduction in November fade. It's important to keep some of this in perspective: The US economy appears resilient, but inflation is coming down quickly. Additional cuts are coming, but are likely to be quarter-point increments, the usual size of adjustments absent a crisis, rather than half-point moves like the one in September. 

And what of intervention? The beauty of the government's yen buying in April and July is that MOF picked its shots. The ministry didn't announce its moves, and sometimes waited for markets to run in the right direction before joining the fray to give the yen an extra boost. Intervention is back as a legitimate tool, after being frowned on the past few decades. It would be unrealistic to think Japan wouldn't show its hand in markets again.

Ultimately, discussion of the yen gets back to the question of rates. While the Fed is first among equals and has historically set the pace globally, local dynamics do matter. Ueda can point to Washington all he wants, but his inability to settle on a consistent message is part of what ails his nation's currency. The BOJ probably does want to tighten again and get the main rate close to 1% in a series of steps — it's now just 0.25%. If only Ueda could say that out loud and not be so fearful.

More From Bloomberg Opinion: 

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 for economics at Bloomberg News.

/opinion

This article was generated from an automated news agency feed without modifications to text.