The Japanese Yen (JPY) continues to trade near recent lows, prompting concerns among investors regarding potential government fiscal policies and the currency’s ongoing weakness. The Bank of Japan (BoJ) has indicated a growing urgency to address the situation, suggesting that rate hikes could be on the horizon as early as December 2023 or January 2024. This comes in the wake of the USD/JPY pair reaching a high of 157.89 last week, marking an approximate increase of ten figures since Sanae Takaichi secured the leadership of the Liberal Democratic Party (LDP).
The recent decline of the yen was exacerbated by the government’s announcement of a larger-than-expected fiscal stimulus plan, raising doubts about Japan’s fiscal health. This announcement led to a significant sell-off in the yen, with the yield on 10-year Japanese Government Bonds (JGB) hitting a new cyclical high of 1.85% before retreating slightly below 1.80%. According to Lee Hardman, a foreign exchange analyst at MUFG, this fluctuation has somewhat alleviated the momentum of yen selling.
BoJ’s Growing Concerns Over Yen Weakness
Japanese policymakers are increasingly worried about the sharp depreciation of the yen. The BoJ has signaled a rising risk of direct intervention to support the currency if the current trend continues. In a recent exclusive interview, Kazuyuki Masu, a member of the BoJ’s policy board, stated, “I can’t say what month it’ll be, but in terms of distance, we’re close” to raising rates again. This marks a significant shift in perspective, as Masu had previously been regarded as one of the more dovish members of the board.
BoJ Governor Kazuo Ueda and fellow board member Junko Koeda have also expressed greater concern over the yen’s weakness, emphasizing the necessity for policy normalization. Their statements suggest a potential shift towards tightening monetary policy, aligning with the market’s anticipation of another rate hike in the upcoming months. Nonetheless, skepticism remains among investors regarding the government’s willingness to support this shift, given its focus on growth.
Market participants are cautious as they await further developments. The ongoing uncertainty over whether the government will resist an earlier rate hike to maintain a more supportive policy for economic growth continues to loom over the yen. Until these doubts are resolved, the yen is likely to remain under pressure, struggling to recover from its deeply undervalued state.
As the situation unfolds, the dynamics surrounding the Japanese Yen and BoJ policies will be closely monitored by investors seeking clarity on Japan’s economic trajectory.
