Weak yen could make BOJ's Ueda lean more toward hawkish stance
A pedestrian walks past the Bank of Japan (BOJ) building in central Tokyo, Japan, April 25, 2024. (AFP Photo)


The yen's drop to fresh 34-year lows is likely to force the Bank of Japan (BOJ) Governor Kazuo Ueda to walk a thin line in guiding monetary policy this week as he tries to maintain a calibrated path to exiting ultra-easy rates without upending the currency.

The BOJ chief will be mindful of avoiding the episode of 2022 when his predecessor's dovish remarks triggered a yen plunge that forced Tokyo to intervene to prop up the currency.

Ueda has ruled out the chance of aggressive rate hikes due to Japan's fragile economy, which has, in part, fed expectations of low-for-longer rates and emboldened yen bears.

In recent comments, however, Ueda has dropped hints the BOJ could raise borrowing costs again later this year, although that has hardly done anything to reverse the yen's inexorable slide over the past few months.

The BOJ is expected to keep interest rates steady at a two-day meeting ending on Friday, and project inflation to stay near its 2% target in coming years on prospects of steady wage gains.

The prospect of Japanese rates staying low for an extended period and expectations for a delayed start to U.S. rate cuts have continued to push down the yen despite aggressive jawboning by Japanese authorities.

The yen fell below 155 to the dollar on Thursday, a level seen as authorities' line in the sand that heightens the chance of currency intervention.

The dollar rose to 155.37 yen on Wednesday, its strongest level since mid-1990, before falling back in choppy trading. It was last at 155.29 yen in Asia on Thursday.

"There is no change to our stance. We'll watch market moves carefully and respond appropriately," Finance Minister Shunichi Suzuki told parliament on Thursday when urged by an opposition lawmaker to intervene in the currency market.

Chief Cabinet Secretary Yoshimasa Hayashi also said Japanese authorities were ready to take action as needed.

"It's important for currency rates to move stably, reflecting fundamentals. Excessive volatility is undesirable," Hayashi said at a news conference. He declined to comment on recent yen moves or the possibility of currency intervention.

Markets are focusing on whether BOJ President Ueda will adopt a more hawkish tone regarding the prospects of a near-term interest rate hike.

"The BOJ won't hike rates just for the sake of preventing yen declines," said former BOJ official Nobuyasu Atago.

"But he may repeat his recent commentary that the BOJ would respond if yen moves have a big impact on the economy and prices. If that keeps markets guessing the timing of a rate hike could be pushed forward, it would be effective jawboning."

Ueda will hold a press conference after the two-day meeting concludes on Friday.

Repeat of 2022?

Some analysts point to the risk of a repeat of September 2022, when Japan intervened to prop up the yen after it plunged on former BOJ Governor Haruhiko Kuroda's post-meeting remarks stressing the bank's resolve to maintain ultra-loose policy.

In Japan, the Ministry of Finance, not the BOJ, is in charge of deciding when to intervene in the currency market. The decision is highly political and typically reflects the administration's views on whether yen moves warrant action.

There seems to be no consensus within the ruling Liberal Democratic Party (LDP), however, on whether the time is rife for currency intervention.

Japan's ruling party is not yet actively discussing what yen levels would be deemed worth intervening in the market, though the currency's slide toward 160 to the dollar could prod policymakers to act, party executive Takao Ochi told Reuters.

Markets are also focusing on whether the BOJ will keep the unchanged guidance it offered in March to keep buying government bonds at the current pace of 6 trillion yen per month.

Analysts say removing or tweaking the guidance could be interpreted by markets as suggesting that the BOJ will soon taper its bond-buying to allow bond yields to rise more.

Alternately, the BOJ may announce a modest decline in its bond-buying plans for May, which will be released after the policy meeting, some analysts say.

Speaking at a seminar in Washington last week, Ueda said the BOJ will eventually start shrinking its balance sheet and roll out the process regardless of the economy's state.

But Ueda has stressed that the BOJ will not dramatically change the pace of bond buying for the time being and won't use the size of its asset purchases as a monetary policy tool.