Yen's Upside Outlook as Rate Hike Signals Faint

Japanese Yen Hits Bottom on Lack of Clear Signals from Monetary Authority

The Japanese yen continued to decline against other currencies in the first trading session of the week after the Bank of Japan (BOJ) policy meeting did not satisfy market expectations. The depreciation pressure also came from the rising yield of the US 10-year Treasury bond as the market awaited more clues on future inflation data.

As expected, the BOJ voted to keep its benchmark interest rate unchanged at 0.1% and kept monetary policy unchanged. The BOJ maintained its current pace of government bond purchases at 6 trillion yen ($38 billion) a month, which it will reduce at its July meeting. The BOJ also gave no indication that it would continue to raise short-term interest rates to levels that the market could not control. Some analysts had expected the central bank to give clearer signals rather than just general statements.

Former BOJ board member Makoto Sakurai predicted the BOJ would likely not raise interest rates in July and wait for clearer signals on whether summer subsidies and wage hikes can help consumption recover better.

“The BOJ is unlikely to raise interest rates in the short term as doing so would push up mortgage rates and hurt already weak housing investment. If the economy and prices develop in line with its forecasts, the central bank could raise rates by 0.5% by the end of next year,” he said.

Katsuhiro Oshima, chief economist at Mitsubishi UFJ Morgan Stanley Securities, said the BOJ may be trying to pave the way for a cut in bond purchases without causing shock.

According to former BOJ board member Takahide Kiuchi, the yen's depreciation is not limited to the US dollar but has spread to other currencies including the euro. The reason is that the BOJ has been reluctant to raise interest rates despite global inflationary pressures and has failed to prevent the decline of its own currency.

The economy slows down because of the devaluation of the currency.

Japan’s weakening currency has become a headache for policymakers as it raises import prices, raising the cost of living and hurting consumer spending. On the positive side, tourism has benefited.

Exporters, who make up more than half of Japan’s Topix stock index, have seen profits soar. Bank of America estimates that every yen’s rise against the dollar can boost operating profits by 0.5 percent for companies in the Topix 500, which tracks Japan’s largest companies.

In contrast, Japan's GDP in the first quarter of 2024 decreased by 0.5% compared to the previous quarter and 2% compared to the same period last year. The International Monetary Fund forecasts that Japan's nominal GDP will be surpassed by India and fall from the fourth place in the world to the fifth place next year.

Japanese stocks fell more than 6% in late May as global investors shifted funds from Japan to other markets, including Hong Kong and mainland China. The weaker currency also hit consumer spending, with private consumption and capital expenditure declining due to higher import costs.