By Tomoyuki Tachikawa,
The recent yen's fall to a 34-year low against the U.S. dollar is unlikely to prompt the Bank of Japan to tighten its policy again anytime soon, with the yen's underlying trend expected to reverse course later this year.
With expectations growing that the U.S. Federal Reserve will begin cutting its key interest rate in the near future, the dollar is poised to face a downturn versus the yen in the mid- and long-term, even if Japan's central bank sticks to its accommodative policy stance as it pledged to after its first interest rate hike in 17 years on March 19, analysts said.
On Wednesday, the yen briefly sank to 151.97 against the dollar, a level not seen since 1990, after BOJ board member Naoki Tamura said its policy will remain accommodative. The Japanese currency is expected to hover at "around 145 three months ahead," said Tsuyoshi Ueno, senior economist at NLI Research Institute.
Koichi Fujishiro, senior economist at Dai-ichi Life Research Institute, expects the BOJ's next rate hike to come as early as October, despite concern that monetary tightening would exert downward pressure on the economy.
A weaker yen is usually a boon for Japanese exports but also poses problems in other areas, raising import prices and triggering cost-push inflation. Japan depends on imports for more than 90 percent of its energy needs.
If the Japanese authorities want to stem the yen's slide, the Finance Ministry might intervene in the foreign exchange market by buying the Japanese currency and selling the dollar.
Nevertheless, Takeshi Minami, chief economist at the Norinchukin Research Institute, said that while such an operation is "one way to put a stop to the yen's depreciation, the effect would be limited."
A source familiar with the central bank's thinking said government and BOJ officials "appear not to be in a rush to act in an active manner to curtail the yen's slide now," as they believe the yen will enter a gradual upward trend sooner or later.
Japan's central bank scrapped its negative interest rate policy at its latest meeting, overhauling its unorthodox monetary easing framework that had been implemented over the past decade to fight deflation.
The bank also abolished its yield cap program, under which long-term interest rates have been at extremely low levels, while ending its purchases of assets such as exchange-traded funds. The measures were major remnants of the BOJ's drastic monetary easing.
The BOJ, meanwhile, pledged to maintain an accommodative environment for the time being, fanning speculation that interest rate hikes by Japan's central bank will be gradual and encouraging market participants to reduce their holdings of the yen.
Rising prices without sufficient wage increase have undermined consumer sentiment, apparently preventing Japan from achieving sustainable economic growth supported by robust domestic demand including household spending.
Japan's real wages, adjusted for inflation, in January were down 0.6 percent from a year earlier, registering the 22nd straight month of decrease, while the country's economy edged up by an annualized rate of 0.4 percent in the October-December quarter of 2023.
The Japanese Trade Union Confederation said in a preliminary survey in early March that companies agreed to wage increases averaging 5.28 percent at this year's negotiations with labor unions, marking the sharpest rise in more than 30 years.
But many economists point out that this wage growth mainly benefits employees of large firms, with the March Kyodo News poll showing that 87.9 percent of respondents do not feel that Japan's economy has improved.
After the Japanese currency plummeted on Wednesday, Finance Minister Shunichi Suzuki said the government will take "decisive steps" to curb excessive weakness in the yen, without ruling out the possibility of intervening in the foreign exchange market.
At a parliamentary session the same day, BOJ Governor Kazuo Ueda said the central bank is "closely" watching the impact of the yen's movements on the economy and prices, but he declined to comment on currency market moves.
However, the central bank will not take any aggressive action unless the yen loses momentum in rallying against the dollar as it hopes, financial experts said, adding the BOJ will adopt a wait-and-see attitude at least until the fall.
Yoshimasa Maruyama, chief economist at SMBC Nikko Securities Inc., said the BOJ may decide the optimal timing of the next rate hike later this year.
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