Rate Hike, Intervention Can't Reverse Weak Yen

Tightening monetary policy or intervening in the currency market will do little to reverse unwelcome yen declines that inflate already rising fuel and raw material prices. Japanese policymakers have historically battled sharp yen rises that threaten to damage exports by issuing verbal warnings or currency intervention, while keeping a hands-off approach on yen falls. This time is no different.

The policy board, governed by Haruhiko Kuroda, on Tuesday, voted 8-1, to hold the interest rate at -0.1 percent on current accounts that financial institutions maintain at the central bank. The regulator promised to continue to purchase a ‘necessary amount’ of Japanese government bonds without setting an upper limit so that 10-year JGB yields will remain at around zero percent.

According to the statement, Japan's economy has picked up as a trend. Furthermore, the BoJ said that inflation is likely to increase clearly in positive territory for the time being due to a significant rise in energy prices. Also, the bank noted that in the wake of the Russia-Ukraine military conflict, global financial and capital markets have been volatile and prices of commodities such as crude oil have risen significantly, and future developments warrant attention.

Yen has dropped over 3% against the dollar so far this month. That has drawn concern from politicians, who worry about the damage it could do to domestic households and retailers via higher fuel and food costs.

Some prominent analysts say that the yen, now hovering around 119 yen, may fall below 120 to the dollar already this week and add pressure on Japan's resource-poor, import-reliant economy. The Bank of Japan keeps routinely saying a weak yen is good for the economy. But if crude oil prices are to further rise profoundly – something that many commodity analysts predict based on the situation in Eastern Europe, it's uncertain whether it can keep calm and reflexing.

However, unlike weakening the yen, BoJ is apparently lacking the resources and stamina to do the opposite. Currency intervention aiming to stop the yen from falling won't work given the huge size of the global currency market and the status of Japanese currency that, along with the British pound, remains the Fx pair of choice for the most influential and powerful speculators. Tightening monetary policy won't help either as the BoJ cannot raise interest rates pro-rata the U.S. Federal Reserve, which has signaled hiking aggressively to combat surging inflation - something that BoJ cannot do, or, at least, no one would believe it.

As a result, under current conditions, the BoJ would probably refrain from tweaking interest rates and probably limit by playing with the sizes of asset purchases – if this could only be taken seriously by the Fx players. In any case, tightening now would be doing something useless.