No sooner had Bank of Japan Governor Haruhiko Kuroda finished insisting that ultra-easy money was here to stay than authorities swept in to mop up the damage. If there was ever any doubt that the primary cause of the yen’s collapse this year was the BOJ’s prolonged easing in the face of interest-rate hikes pretty much everywhere else, it was wiped away Thursday.
The Ministry of Finance, which directs Japan’s currency policy, intervened to boost the beleaguered yen for the first time in decades. The purchases strengthened the yen through 141 per dollar; the currency had earlier weakened past 145, the cheapest it had been since the Asian financial crisis of the late 1990s. Kuroda had barely left the BOJ press room, where he defended the board’s decision to keep monetary settings unchanged. That is rates in negative territory, commitment to harness bond yields near zero and forward guidance that countenances further easing. All this despite inflation that’s well above the target of 2%.
Masato Kanda, the government’s top foreign exchange official, told reporters that Japan took “bold action” to quell moves that were sudden and one-sided. The step followed weeks of jawboning that largely failed to restrain yen sellers. What Japan says and does in the days and weeks ahead is critical. If the goal is to inject some two-way risk into trading and cushion the yen’s decline, Japan can possibly eke out a tactical victory. If the ambition is to turn around the underlying direction, that is a far taller order. Policy needs to be broadly aligned across the spectrum in Japan for that to happen. And as Kuroda spent the afternoon reminding everyone, the monetary arena will be all about protracted stimulus.
The yen has been hammered: It has lost about 20% against the greenback this year. The principal driver of the slide is lax rates in Japan relative to America. The canyon between the Federal Reserve Chair Jerome Powell and Kuroda was underscored Wednesday by the US central bank’s third-consecutive rate hike of 75 basis points and the projection of sizeable moves to come. In a real-time display of Japan’s isolation, authorities in Indonesia, the Philippines and Switzerland pushed borrowing costs higher while Kuroda spoke at his post-meeting media briefing.
The easiest way to turn the yen around on a sustained basis would be for the BOJ to hold out the prospect that, just maybe, some kind of small change might be coming, even if highly conditional. Kuroda’s refusal doesn’t make the task of buttressing the yen easier. The bank’s preference for glacial movement is highlighted by the way it’s phasing out a Covid-relief funding scheme for struggling businesses. Many economists had predicted that program would be wrapped up this month. Nobody expected the BOJ to this week relax its grip on 10-year government bond yields, which it’s committed to holding near zero — with a little wiggle room either side. Perish the thought that the main interest rate, still negative, be raised even to zero. Japan has reasons for not going there: Kuroda expects inflation to recede and is wary of the global slowdown. The pace of price increases is the fastest in three decades, but remains below levels in the US and Europe. He may be the last member of “team transitory” still standing.
But that is different from insisting further easing may be warranted. Kuroda is careful of saying anything that invites speculation that the long-awaited shift is in the wings. Making even a small change to forward guidance will get people handicapping what kind of tightening Japan will contemplate. As bothersome as the BOJ may find that, it would offer some support to the yen. Without a whiff of change at the BOJ, unilateral intervention won’t do much to alter the yen’s underlying downward trajectory.
It’s enough to make you wonder why Kuroda appeared to ditch the forward guidance a few months ago during remarks in New York. After emphasizing that the bank’s role was to support the nascent economic recovery, Kuroda made a startling observation: “At the same time, I do not think Japan’s economy is in such a vulnerable situation that additional easing is required,” according to the text of a speech at Columbia University on April 22.
It would have been reasonable to then expect that the BOJ might move to a more balanced line. Did Kuroda send up a trial balloon that didn’t go down well internally? Did his speechwriter leave the reservation? The governor went so far as to say in his press conference Thursday that the guidance may remain for two or three years. As a practical matter, this binds the bank only as long as Kuroda is in the building. His second term ends in April.
Kuroda may have an eye on history. The few times in recent decades that Japan has lifted rates — to still very accommodative levels — officials have had to quickly retreat. That happened after nudges higher in 2000, 2007 and 2008 that were followed by global downdrafts. The lesson seems to be the longer Tokyo waits to join the rate cycle, the quicker it backtracks.
Neither Kuroda nor the MOF is saying the yen needs to be a world beater. They know the fundamentals are moving against them. They square the circle by saying they don’t like too much excitement and speculation in markets. They would no doubt prefer a steadier decline. But much of it is out of their hands. Prior to the past few months, the Fed hadn’t hiked by 75 basis points in a single bound since 1994. It has now done that on three consecutive occasions, with a fourth in November entirely conceivable.
Earlier in his career, Kuroda was himself the top currency guy at the MOF and ordered his fair share of interventions. His comments after this action will be scrutinized even more closely. Officially, Japan will have to work hard to avoid being seen in open conflict. Guiding markets, or stabilizing them, is as much about talk as action. Sometimes symbols can also work. Kuroda wore a tie to Thursday’s press briefing. He has lately preferred an open-neck shirt. We should have seen it all coming.
Japan has been caricatured over the years as a place where nothing changes. I have often thought that critique unfair. The BOJ is doing a fine job of proving me wrong. It may be up to Kuroda’s successor to move the monetary-policy ball forward. Or backwards, depending how low they are prepared to see the yen go.
More From Bloomberg Opinion:
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• Fed Splits the Difference on Labor Market Pain: Jonathan Levin
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Daniel Moss is a Bloomberg Opinion columnist covering Asian economies. Previously, he was executive editor of Bloomberg News for economics.
More stories like this are available on bloomberg.com/opinion
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