Weaker yen likely to prompt BOJ message shift, ex-official says

A further depreciation of the yen won’t be good for Japan’s economy and may prompt a shift in the central bank’s messaging, according to a former Bank of Japan official, speaking after the currency set a fresh low of more than five years.

“The yen has already moved a lot compared with last year, so a further weakening means volatility has generally been high. That isn’t at all desirable,” Kazuo Momma, a former top official in charge of monetary policy at the BOJ, said in an interview.

Until now the central bank has appeared to emphasize that a weak yen is positive for the economy overall, but it may need to shift the nuance of its communications on that point, he said.

Still, with the economy currently in a fragile state and the war in Ukraine heightening uncertainties, there is no way the BOJ will look at moves to normalize policy, he added.

Momma was speaking before an expected rate increase by the Federal Reserve this week that will widen the gap between its policy stance and the BOJ’s, adding to the downward pressure on the yen. Japan’s central bank is widely expected to keep its main policy settings on hold Friday.

Ahead of the decisions, the yen softened to 118.45 against the dollar at one point during market hours in Tokyo on Tuesday, its weakest since January 2017. That compares with its strongest level this month of 114.65.

While a softer yen will benefit Japan’s exporters and its globally focused companies, it will ramp up the pain for consumers and small businesses that are already feeling the pinch from surging commodity prices, Momma said.

“I see a high possibility that the BOJ will put more emphasis on its messaging that the effect of the yen on different economic players varies and must be closely monitored,” he added. “Consumers are getting hit most by the high commodity prices and a weaker yen will make it even worse,” he said.

An increasing number of economists expect Japan’s economy to shrink again this quarter, with consumer spending in danger of remaining weak even if virus restrictions are lifted as higher energy prices fueled partly by the war in Ukraine squeeze household budgets.

That means the BOJ must stay on full alert over the economy this year and its recovery, Momma said. In these circumstances, there is “absolutely no chance” of the bank making moves toward normalization that might support the yen, he added.

Rising energy and commodity prices are driving cost-push inflation and could well push the consumer price index above 2%, he said. While inflation over a wider range of items remains subdued compared with the United States and other economies, price growth is expected to accelerate from April.

“The current inflation is going to make it harder for companies to raise wages with a drop in profits,” Momma said. “That means the BOJ is getting further away from the sustainable 2% inflation it’s aiming for.”

With the BOJ already at the limit of its easing possibilities, Prime Minister Fumio Kishida will probably need to play a leading role in supporting the economy, Momma said. The government could consider a further economic package of about ¥10 trillion ($84 billion) to heal the pain of consumers and businesses, he said.

The current economic conditions even make it difficult to see normalization steps by the BOJ even after Gov. Haruhiko Kuroda’s term ends in April next year, Momma said.

“You can’t simply change policy just because the leadership changes,” Momma said. “For that to happen, the economic conditions must change for better first.”