Central Banks

The Bank of Japan is about to unveil a new tactic in the currency war

The Bank of Japan needs to engineer a stealth devaluation of the yen

PUBLISHED : Tuesday, 26 April, 2016, 9:02am
UPDATED : Tuesday, 26 April, 2016, 6:40pm

Japan might not have got the reception it had hoped for when it raised its concerns about the impact of a rising yen on the Japanese economy, at the mid April G20 gathering held in Washington, but that doesn’t mean Tokyo is all out of options, especially with the Bank of Japan (BOJ) set to meet during its two-day meeting which kicks off Wednesday.

Nevertheless, apparent international, and specifically US, objections to overt market activity by the Tokyo authorities to weaken the Japanese currency has significantly raised the bar for Japan’s Ministry of Finance (MOF) if it was contemplating ordering the BOJ to intervene to sell the yen on the currency markets.

The yen’s appreciation actually reflects, at least in part, a perception in the currency market that BOJ policy, which had indirectly supported a weaker yen, was running up against the limits of its effectiveness

“Despite recent yen appreciation, foreign exchange markets remain orderly,” said US Treasury Secretary Jack Lew on April 15 in marked contrast to Japan’s Finance Minister Taro Aso’s view, as expressed to Lew just a day earlier, that “excessive volatility and disorderly currency moves would have a negative impact on the [Japanese] economy.”

While Lew might understand Aso’s “deep concern over recent one-sided moves in the currency market,” the US Treasury Secretary made it clear that Washington could not currently favour intervention by Japan in the foreign exchange market to weaken the yen.

“At a time of slow and uneven global growth, avoiding beggar-thy-neighbour exchange rate policies is particularly important,” Lew said on April 16.

In truth Washington can scarcely criticise China, as has been the case regularly in the past, for leaning against a rise in the yuan and then not demur at the possibility of Tokyo acting overtly to weaken the yen.

After all, the United States had already voiced little or no concern when monetary policy settings, adopted by the BOJ since Japanese Prime Minister Shinzo Abe returned to power in 2012, indirectly led to a devaluation in the yen that has only been partially reversed in recent months.

There is also the fact that Japan was a signatory to the G20 statement in February that committed signatories to refrain from exchange rate targeting in their policies.

Others also recognise their responsibilities in this regard.

One European Central Bank source, speaking on condition of anonymity, told Reuters on April 15 of the need to avoid even giving the impression that “we’re targeting the exchange rate,” while also recognising a stronger euro doesn’t help the ECB in its attempt to ignite price inflation in the euro zone.

But if the bar to Japan physically intervening in the foreign exchange market has, at least for now, been raised very high, Japanese policymakers are not happy about the yen’s appreciation. That could mean more pressure on the BOJ to adopt further monetary policy measures that should, Tokyo might hope, lead to less demand for Japan’s currency.

Indeed although Japan’s MOF is the ultimate arbiter of yen policy, on arriving in Washington for the recent G20 meeting BOJ Governor Haruhiko Kuroda described the yen’s rise this year as “excessive.”

It is also worth noting Kuroda’s attitude to the BOJ’s adoption in January of an albeit nuanced negative interest rate policy (NIRP) given that, since that decision, the yen has staged a rally rather than, as might have been expected, fallen in value.

Speaking at Columbia University on April 13 Kuroda argued that the BOJ adopted NIRP because there were risks of a “setback in the conversion of people’s deflationary mindset.”

Kuroda characterised the new policy settings as needed “to maintain the momentum toward achieving the price stability target,” essentially therefore being the next phase of monetary policy settings that had previously, though indirectly, occasioned yen weakness.

Kuroda would likely contend that global conditions fed the 2016 yen rally and that Japan’s currency would have risen even further without NIRP.

Of course many currency analysts would argue instead that the yen’s appreciation actually reflects, at least in part, a perception in the currency market that BOJ policy, which had indirectly supported a weaker yen, was running up against the limits of its effectiveness.

But currency analysts don’t set BOJ monetary policy.

BOJ Governor Kuroda told his Columbia audience “that our monetary policy ... isn’t targeted at exchange rates” but he also told Japan’s Parliament on April 20 that “the G20 shares the view that its agreement warning against competitive currency devaluation won’t constrain monetary policy, including negative interest rates.”

A lower yen as a consequence of monetary policy change would not therefore, in Kuroda’s eyes, be characterised as a direct attempt to weaken the Japanese currency.

The BOJ could choose to ease monetary policy yet further when the April meeting concludes Thursday.