Japanese yen plunged to record lows against the euro and the Swiss franc on Monday as currency markets responded to the lack of tough hawkish signals by the Bank of Japan (BOJ). Any attempt to back down movements was in response to recurrent threats by Japanese officials that the government was ready to step in to reduce extreme volatility in the currency.
The latest communication by the BOJ was interpreted by traders as confirming that monetary tightening will be done at a slow and gradual pace, which consolidated the gap between the yields in Japan and other leading economies. This deviation has since taken its toll on the yen, which has already been subjected to months of constant pressure.
Key Takeaways
- The yen has dropped to levels never witnessed before against the euro and Swiss currency as market confidence is low.
- The rate increment by the BOJ was much anticipated, but it could not boost the currency.
- The absence of definite instructions on further tightening frustrated investors.
- Japanese officials had warned them verbally, and this had not been effective.
- The markets are keenly awaiting the next statements of Governor Ueda to get policy indications.
An Announcement of a Raise, but a Message that is not Convincing
On Friday, BOJ increased its policy rate by 25 basis points to about 0.75, the highest since almost thirty years. The initiative was highly expected and hence did not offer any significant value to the currency.
What is more crucial is that the forward guidance by the central bank was not satisfactory to the satisfaction of the market players. Although the statement that followed restated the willingness of the BOJ to proceed with the normalisation of the policy in case the economic environment permits it, Governor Kazuo Ueda did not provide any insight in terms of rate increases and the rates at which they could be increased.
This was the caution of the bond markets. The yields on Japanese government bonds were kept at a low level, and this kept the yen on the downside, keeping a check on any increase in the yen, and this made the views solid and strengthened the mind that Japan will be lagging in the financial tightening by the world community.
Intervention Warnings do not pacify Markets
Japanese officials again issued threats that they are ready to take the necessary steps to combat excessive currency actions. But investors seemed not to have been convinced, pointing out that verbal interventions in the past have hardly worked unless supported by some decisive market operations.
The depreciation of the yen against the Swiss franc to record lows was a reminder of the increasing worry that the monetary policy of Japan is beginning to deviate at a time when the world is still experiencing high interest rates.
The Future Speech of Ueda in the Spotlight
It is the speech of Governor Ueda at a large Japanese business conference, which will seek greater clarity on the issue of inflation, growth in wages and the future trend of interest rates. Any sign of an accelerated tightening process may provide a temporary relief for the yen, but the future is quite low.
What Experts Say
Economists discuss that the weakness of the Yen is not really a matter of short-term policy action, but rather a positioning strategy.
According to currency strategists, the gradualist strategy of Japan is in marked contrast to the central banks of Europe and Switzerland, which still adopt a restrictive stance. As long as the real yields are negative in Japan, capital will probably move out, and the yen will continue to be under pressure.
There are also those analysts who warn that long-term currency weakness would ultimately compel the BOJ to adopt a stronger hand, especially when the inflation that is fuelled by imports starts to dampen the purchasing power of households.
Frequently Asked Questions
Owing to the already anticipated rise in rates and lack of a clear roadmap to accelerated tightening by the BOJ, yield differentials should be maintained at broad levels.
Governments have shown willingness, but markets usually want bold moves and not promises of action.
This is in contrast to others that keep their policy restrictive; Japan, however, is taking its time to normalise policy by limiting the amount of support given to the yen.
Better inflation statistics, quicker wage gains or more explicit signals about aggressive rate increases may be able to improve the mood.
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