The Pitfall of Yen Weakness... YCC Adjusted but 145 Yen Level 'In Sight'

Yen Surpasses 144 Yen Intraday
BOJ Maintains Yen Weakness Despite Monetary Policy Adjustment
Analysis Suggests Exchange Rate Follows Real Interest Rates
US Credit Rating Downgrade Impacts Strong Dollar

The value of the yen against the dollar has weakened again following the Bank of Japan (BOJ)'s monetary policy adjustment, plunging to the 144-yen range for the first time in a month. Although the BOJ sent a tightening signal last month by raising the long-term interest rate cap, the market response has been lukewarm.

[Image source=Reuters Yonhap News]

On the 10th, the dollar-yen exchange rate in the Tokyo foreign exchange market surged to 144.2 yen at one point during the session. Earlier, the yen exchange rate had surpassed the 144-yen level in early last month, but with expectations that the BOJ might revise its accommodative monetary policy, it settled in the 130-yen range on the 12th of the same month. Then, on the 28th of last month, the BOJ revealed a plan to effectively raise the long-term interest rate from 0.5% to 1.0%, but the exchange rate instead shifted to a weaker phase.

The yen's value plummeted as it became expected that the BOJ's policy adjustment would fail to curb inflation. NHK explained, "Although the BOJ announced a policy to tolerate long-term interest rates rising up to 1%, the market anticipates that real interest rates will decline due to the impact of rising prices," adding, "There is also analysis in the market that the yen exchange rate moves in line with real interest rates." This means that although the BOJ raised nominal interest rates through tightening policy adjustments, real interest rates have actually fallen due to soaring prices. In simple terms, the BOJ's recent measures are insufficient to control inflation.

Furthermore, the BOJ's steadfast commitment to its accommodative policy appears to have influenced the yen's depreciation. BOJ Governor Kazuo Ueda stated at a press conference following the monetary policy meeting on the 28th of last month, "We have not changed our judgment that the inflation rate is still some distance from the 2% target," and added, "It is necessary to persistently continue the accommodative policy under the yield curve control framework." NHK observed that the market interpreted this as the BOJ having a strong determination to maintain its accommodative policy, which contributed to the yen's weakness. Moreover, there is a view that the BOJ's purchase of 300 billion yen worth of government bonds for the first time in five months also fueled the yen's depreciation.

The market is closely watching whether the yen's value will reach 145 yen per dollar, the level at which the BOJ intervened in the foreign exchange market last year. Yukio Ishizuki, a foreign exchange strategist at Daiwa Securities, explained, "If U.S. economic indicators show strength, the dollar's strength will continue," adding, "It is difficult to expect a scenario where the yen appreciates due to rising interest rates in Japan."

This content was produced with the assistance of AI translation services.