The Bank of Japan will be “alert” if the yen weakens above 130 per dollar, according to Eisuke Sakakibara, Japan’s former deputy finance minister for international affairs.
The yen was trading at 123.77 per US dollar on Wednesday morning in Asia.
The Japanese currency fell more than 5% against the greenback in March, despite the traditional view of the yen as a safe-haven currency. Still, the yen was hit hard as geopolitical turmoil such as the Russia-Ukraine war rocked global markets.
The yen’s weakening comes amid expectations that the Bank of Japan would be slower than other central banks to tighten monetary policy.
While its global peers like the US Federal Reserve have started raising interest rates and are expected to take more aggressive steps to curb inflation, the Bank of Japan has continued with its massive stimulus.
The yen’s current level against the greenback is not a problem, said Sakakibara, formerly known as “Mr. Yen” when he led several currency interventions in the 1990s. He pointed out that the dollar-yen was trading between 120 and 125 about four or five years ago.
A Japanese national flag flies in front of the Bank of Japan headquarters on September 27, 2021 in Tokyo, Japan. The Bank of Japan has been pursuing ultra-loose monetary policy for years to meet its always elusive inflation target.
Toru Hanai | Bloomberg | Getty Images
“This yen depreciation reflects the dollar appreciation against the yen and the market expects the yen depreciation to probably continue and some people expect the dollar-yen rate to go towards 130,” Sakakibara said , currently President of the Institute for Indian Economics.
“If it goes to 130 — and beyond 130 — that can cause problems,” he told CNBC’s Asia Squawk Box on Tuesday. The Bank of Japan “will be alarmed” if the dollar-yen crosses above 130, he added.
Japan’s inflation target
Bank of Japan Governor Haruhiko Kuroda said on Tuesday the Japanese currency’s recent moves have been “quite rapid” but reiterated that a weak yen is helping the Japanese economy as a whole, Reuters reported.
Led by Kuroda, the Bank of Japan has pursued ultra-loose monetary policy for years to meet its always elusive inflation target.
“I don’t see that the Bank of Japan is particularly upset if you keep the inflation target front and center,” said Manpreet Gill, head of fixed income, currency and commodities strategy at Standard Chartered Private Bank.
The current situation is actually helping Japan’s central bank to generate inflation, he said, although that may not last as the yen’s recent weakness has been caused by dollar strength and multiple Fed rate hikes have already been priced in .
Meanwhile, NatWest Markets’ Galvin Chia said the Bank of Japan is currently in a “difficult situation”.
“Markets really jumped at this idea, you know, as we’ve seen over the past two weeks that the yen should depreciate,” said Chia, an emerging markets strategist.
“My personal view is that the BOJ is right to be more concerned about pace [the yen’s] Devaluation … and a kind of volatility that can arise in contrast to levels in financial markets,” he said.