While a weak yen gives exports a boost, it has become a headache for Japanese policymakers by pushing up fuel and food-import costs and in turn hurting consumption. — Reuters
TOKYO: A US dollar rally triggered by Republican Donald Trump’s victory in the US presidential election could heighten pressure on the Bank of Japan (BoJ) to raise interest rates as soon as December to prevent the yen from sliding back toward three-decade lows.
Trump’s victory in the US presidential election unleashed sharp US dollar gains, as expectations of tax cuts and tariffs on imports drove optimism about economic growth while fuelling worries about inflation.
The greenback’s strength briefly pushed the yen to a three-month low of 154.71 yesterday, well off a high of 140.62 hit in mid-September.
While a weak yen gives exports a boost, it has become a headache for Japanese policymakers by pushing up fuel and food-import costs and in turn hurting consumption.
Rising inflation was widely seen as one of the factors behind the massive voter swing against the ruling coalition at last month’s general election.
Japan’s top currency diplomat Atsushi Mimura escalated his warning against sharp yen falls yesterday, saying authorities were ready to act against “excessive” currency moves.
One nightmare scenario for policymakers would be a renewed plunge in the yen towards the three-decade trough near 162 to the US dollar hit in July – a move that prodded the BoJ to raise interest rates to 0.25% on July 31.
Back then, the tumbling yen led to calls from ruling party lawmakers for the BoJ to hike rates, or send clearer signs of its intention to push up borrowing costs.
Prime Minister Shigeru Ishiba stunned markets on Oct 2 by saying the economy was not ready for further rate hikes, though he later toned down his message to say he would not intervene in BoJ policy.
“Politicians don’t want a weak yen, so even those who have urged the BoJ to be cautious about raising rates could nod to hikes if yen falls accelerate,” said Tsuyoshi Ueno, senior economist at NLI Research Institute. “In that sense, the weak yen could prod the BoJ into steady rate hikes.”
The BoJ exited a decade-long radical stimulus programme in March and raised short-term interest rates to 0.25% in July on the view Japan was making progress towards sustainably achieving its 2% inflation target.
While many analysts expected the BoJ to hike rates again by next March, they are divided on whether it would act in December – or wait until January or March to gauge more data.
The BoJ kept interest rates steady last month but removed language warning of the need to focus on external risks, leaving open the chance of a near-term hike.
Renewed yen falls may heighten the chance of the BoJ acting in December, given the BoJ’s sensitivity to the currency’s weakness that pushes up import costs, analysts said. — Reuters
