“This is not so much a yen weakness as a dollar strength,” Kuroda told reporters after the central bank kept its policy ultra loose despite concerns it could hurt the Japanese economy as inflation surges globally.
“The euro and the British pound … are falling just as much as the yen, despite monetary policy tightening by the UK and the eurozone central banks … and South Korea’s won is falling at a rapid pace despite significant monetary tightening by the Bank of Korea,” he added.
“It is inconceivable that a small policy shift by the Bank of Japan would stop the yen’s fall,” he said.
But the yen’s fall of 21% over the last 12 months to near a 24-year low is actually much sharper than the currencies that Kuroda cited. The euro, which fell to parity against the dollar for the first time in 20 years earlier this month, is down 14%, while the pound and the won have both dropped 13%.
The central bank’s inaction is expected to keep the yen under pressure, as the monetary policies of Japan and the US diverge.
The US Federal Reserve has raised interest rates by 1.5 percentage points so far this year and is expected to lift them another 1.75 points or more by the end of 2022. Higher interest rates have made the US a more attractive destination for bond investors, resulting in the yen’s sharp depreciation. The Fed is due to hold its next policy meeting on July 26-27.
The European Central Bank is expected to raise interest rates for the first time in 11 years when it holds a policy meeting later on Thursday. The ECB is expected to allow short-term rates to climb out of negative territory by the end of September.
Meanwhile, Japanese central bank decided to keep its key monetary levers unchanged, guiding 10-year yields to zero, and short-term rates to minus 0.1%, and promising to buy Japanese government bonds without limit under its “yield-curve control” policy.
The BOJ has reiterated its commitment to maintain yield-curve control, vowing to conduct unlimited fixed-rate operations at 0.25% every trading day – operations said to be responsible for the yen’s accelerating decline over the past couple of months.
Under the operations, the bank purchases as many Japanese government bonds (JGBs) as it deems necessary to keep the long-term yield at or below 0.25%, even as the corresponding US yields have risen above 3%, up from about 1.7% in March.
This has forced the BOJ to buy massive amounts of JGBs, resulting in a jump in its holdings to more than 50% of the outstanding balance and leaving the bond market largely dysfunctional.
In the press conference on Thursday, Kuroda vowed to stick with the current policy on bond yields. “We have no intention whatsoever of raising rates or changing the yield target band,” he said. “Widening the band beyond 25-basis-points would spoil the effects of monetary policy easing.”
The stand-pat decision was widely anticipated. All 37 economists surveyed by the Japan Center for Economic Research, a Nikkei affiliate, predicted no change in the BOJ’s monetary policy framework through the end of the year.
Kuroda maintains that recovery from the Covid pandemic is slower in Japan than elsewhere and requires monetary stimulus, even though this depresses the yen and reduces consumers’ purchasing power.
Japan’s consumer inflation has been relatively subdued compared with other countries, giving the BOJ a reason to keep the ultra easy policy in place. In May, consumer inflation stood at 2.5%, and excluding fresh food, 2.1%. In the US, consumer inflation stood at 9.1% in June, the level highest in more than 40 years.
The BOJ’s nine policy board members offered a median forecast for consumer inflation, excluding fresh food, of 2.3% for the current fiscal year ending March, up from a 1.9% forecast three months ago.
“The size of the inflation revision was larger than I expected,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute. He questioned what level inflation would have to reach for the BOJ to change policy, but noted that the BOJ predicts inflation to moderate to 1.4% in fiscal 2023.
The forecast for this fiscal year is higher than the “BOJ’s price stability target” of 2%.
The median forecast for economic growth for fiscal 2021 was lowered to 2.4% from 2.9%, amid expectations for a sharp US slowdown this year. The forecasts were presented in the BOJ’s quarterly economic outlook report.