TOKYO: Japan’s former currency chief says the Bank of Japan (BoJ) is “behind the curve” on taking policy action, adding that higher interest rates would help address inflation and stabilise markets.
“Steady and gradual interest rate hikes can respond to inflation, curb excessive yen depreciation and stabilise long-term bond yields,” Takehiko Nakao, former vice-finance minister for international affairs, said in an interview with Bloomberg yesterday.
In characterising the central bank as behind the curve, Nakao cited a global perception that Japan’s policy stance is inconsistent given ongoing inflation.
“The BoJ also must look at the exchange rate,” Nakao said, adding that it’s only natural for the central bank to check that the currency is stable even though doing so is not specified in legislation setting out the central bank’s role.
Nakao’s comments come as economists and investors try to gauge whether Prime Minister Sanae Takaichi’s sweeping election victory will embolden her to put the brakes on interest rate hikes by the BoJ or whether her administration would prefer an early rate hike to help firm up a weak yen.
The yen has gained some ground against the dollar since the election landslide and moved away from levels where the Finance Ministry intervened in 2024, but the currency remains weak.
That’s despite the BoJ raising its policy rate in December to the highest level in 30 years, a move that further narrowed the rate differential with the United States.
“The exchange rate is so much influenced by monetary policies,” Nakao said on Bloomberg TV, speaking with Shery Ahn earlier in the day.
“The BoJ didn’t move interest rates very quickly after the end of the pandemic, but the Federal Reserve Board, although they were criticised to be behind the curve, they started raising the policy rate from 2022 in a very quick manner,” he said.
During his tenure, Nakao oversaw 13.6 trillion yen (around US$88.9bil at Monday’s exchange rate) in interventions to weaken the yen in 2011, when the currency hit record strength of around 75 per dollar following the earthquake, tsunami and nuclear disaster earlier that year.
Nakao, who is now chairman of the Centre for International Economy & Strategy Ltd, said the efforts of Japan’s top currency official, Atsushi Mimura, and Finance Minister Satsuki Katayama to curb excessive yen weakness could be positively evaluated.
After briefly touching around 159 yen per dollar in January, the yen strengthened to about 152 yen amid speculation about possible coordinated action between Tokyo and Washington.
However, data released at month-end showed Japan had not intervened in the market, suggesting that so-called rate checks had been sufficient to support the currency.
Rate checks involve officials asking dealers for currency quotes – a step short of direct intervention that can signal readiness to act and discourage speculative trades.
Through likely rate checks in the United States and Japan, the ministry was able to signal that both countries view a weak yen as undesirable, Nakao said. — Bloomberg
