Original Title: "Sharp Decline in the Yen Forces Central Bank to Raise Interest Rates Earlier? Report: Officials Pay More Attention to the Impact of Weak Currency on Inflation"
Original Author: Yehui Wen, Wall Street Insights
Officials at the Bank of Japan are growing increasingly concerned about the potential impact of a weak yen on inflation, a trend that could significantly disrupt the central bank's future path of interest rate hikes. According to sources speaking to Bloomberg, while the BOJ may keep interest rates unchanged at its upcoming policy meeting, exchange rate considerations could prompt it to reassess the timing of rate hikes, and possibly even force it to act earlier than previously planned.
According to Bloomberg, Japanese central bank officials believe the weakening yen is increasingly affecting prices, and inflationary pressures could intensify further as companies become more inclined to pass on rising input costs to consumers. Although the Bank of Japan recently raised its benchmark interest rate last month and has not set a predetermined path for lending rates, policymakers may consider advancing future rate hikes if the yen continues to weaken.
Currently, private economists generally expect the Bank of Japan to raise interest rates at a pace of roughly every six months, implying the next move could happen this summer. However, according to Bloomberg sources, officials prefer to implement policy adjustments in a timely manner rather than being overly cautious, suggesting that the previously anticipated pace of rate hikes may change. In response to this news, the Japanese yen briefly fell to around 158.68 against the U.S. dollar before rebounding to 158.33. As of the time of writing, the yen had fallen to 158.55 against the dollar.
Expectations for the January meeting: keeping interest rates unchanged
The Bank of Japan will announce its latest policy decision on January 23. According to informed sources speaking to the media, officials currently believe that maintaining the interest rate at 0.75% is appropriate, a level that has reached a 30-year high. Although there is an overall inclination to keep the current policy unchanged, the committee will continue to monitor economic data and financial market developments up until the last moment to make its final decision.
The focus of this meeting will be on how the central bank assesses the impact of the yen on potential inflation. According to Bloomberg sources, as inflation trends approach the central bank's 2% target, officials will closely monitor how exchange rate fluctuations affect households' and businesses' price expectations.
Exchange Rate Transmission Mechanism Attracts Attention
A weaker yen typically increases inflationary pressures by raising import costs, while also boosting the profits of exporters. However, some officials have pointed out that as the yen remains persistently weak, its negative effects on the economy may be growing. Officials believe that the Bank of Japan still has room to continue raising interest rates, with the key being to time policy adjustments appropriately.
Japanese businesses are increasingly voicing concerns about exchange rate issues. This week, Yoshinobu Tsutsui, the president of Japan's largest business lobbying group—the Keidanren—rarely commented, calling on the government to intervene in the currency market to prevent excessive depreciation of the yen, and describing the recent yen's movement as "a bit overdone."
Market Background and Political Factors
Although the Bank of Japan raised its benchmark interest rate on December 19, the yen remained weak against the U.S. dollar. Influenced by news that Prime Minister Sanae Takaichi will hold an early election next month, the yen fell further this week to a new 18-month low.
According to data compiled by Bloomberg, the 10-year average exchange rate of the yen against the dollar is 123.20, while over the past two years and more, the yen has fluctuated roughly between 140 and 161.95. Although the yen has slightly rebounded after hitting an 18-month low earlier this week, as monetary authorities have intensified their warnings, the overall depreciation trend continues to exert pressure on the central bank's policy decisions.
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