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How the Bank of Japan’s policy may affect the weak yen

The Bank of Japan may be limited in its ability to deal with the recent weakness in the yen, but experts who spoke to CNBC noted that the currency is still not the central bank’s main focus.

The Japanese yen went above 130 against the dollar on Thursday after the BOJ reiterated its ultralight monetary policy stance, a stark contrast to peers in other developed economies where central banks have expressed concern over inflation.

From Friday afternoon during Asia’s opening hours, the Japanese currency traded at 130.21 per dollar, a sharp weakening from levels close to 115, it traded at against the dollar in early March.

The exchange rate is not in the Bank of Japan’s mandate.

Takatoshi Ito

Former Japanese Deputy Finance Minister

The yen has weakened sharply against the dollar for weeks as monetary policy prospects between Japan and the United States continue to diverge.

On Thursday, the Bank of Japan promised to buy unlimited amounts of bonds daily to defend its yield target.

In contrast, the head of the US Federal Reserve has confirmed the central bank’s willingness to take aggressive steps against inflation. The CME FedWatch tool shows that markets are broadly expecting a 50 basis point rate hike in May.

“A lot of people are talking in the context where the BOJ might be adjusting their … political framework,” said Kazuo Momma, executive economist at Mizuho Research & Technologies. “I think it’s unthinkable or very difficult for the BOJ to do anything about it.”

First, the gap between Japanese and US interest rates will remain “huge,” even if the BOJ decides to “adjust a little bit of interest rates,” Momma said.

Furthermore, any move in the Bank of Japan’s yield curve control policy could end up being counterproductive and introduce market speculation regarding the central bank’s next move, he warned. Interest rate curve control is a BOJ policy aimed at stimulating the country’s economy by keeping the 10-year Japanese government bond yield at around 0%.

“Just one move would be very dangerous for the BOJ to do that … they are careful to send a message to respond to the pressure from the market,” Momma said. “They will continue to send a strong signal that they will remain the same in terms of managing the yield curve.”

Meanwhile, two experts told CNBC that the Bank of Japan had taken the “right step” as its current mandate is to help the economy reach a perpetually elusive inflation target.

“The exchange rate is not in the Bank of Japan’s mandate,” said Takatoshi Ito, who previously served as Japan’s deputy finance minister. Concerns about the yen weakness should instead be addressed by Japan’s finance ministry, he said.

“The interest rate yes has an impact on the exchange rate, but it also has an impact on [capital expenditure] and mortgages, mortgages and other long-term assets, “said Ito, who is currently a professor of international and public affairs at Columbia University.” It is a very indirect way of influencing the exchange rate. “

Agreeing with Ito, RMB Capital’s Masakazu Hosomi said the Bank of Japan’s current political stance is in line with its focus on combating deflation.

Since 2016, the Bank of Japan has adopted negative interest rates in an attempt to reverse decades of deflation by encouraging borrowing and spending. These efforts have had a limited impact on achieving the BOJ’s 2% inflation target, which prevented it from raising interest rates.

“The biggest problem in Japan has been deflation, not inflation, unlike the United States and Europe,” said Hosomi, a partner and portfolio manager at the firm.

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