A number of international central banks are starting a series of rate rises and balance sheet reduction programs, which are putting pressure on the Bank of Japan to abandon its ultra-loose monetary policy. While many central banks, such as the Federal Reserve (Fed) and the Bank of England (BoE), are attempting to navigate a challenging course of stifling rampant inflation while leaving their economies with enough liquidity to grow, the BoJ is facing a different set of issues, including anemic growth and persistently below-target inflation. The Japanese Yen keeps declining as interest rate gaps between Japan and other major economies grow. Furthermore, it appears that the Bank of Japan is actively supporting this development rather than only watching it unfold.
Advantages of Weaker Currency
When compared to peers, a country’s currency is weak, which increases the competitiveness of its exports. These increased sales in turn support job creation, economic expansion, and the balance of payments for the respective nations. Additionally, a weaker currency increases the cost of imports, which raises inflation. Without having to use harsh domestic budgetary measures, a nation may assist direct its economy towards the landing zone it wants by changing the value of its currency.
Currency manipulation is frowned upon, especially by one’s main trade partners, even if shifting one’s currency to fit domestic policy may seem economically beneficial in theory. The US Treasury has a series of requirements for what it considers to be currency manipulation, and if these requirements are completed, the US will work with the participating nation to remove the unfair competitive advantage this manipulation has produced. The US can impose trade sanctions on its counterparty if everything else fails.
A History of Intervention by the Bank of Japan
Over the last 25 years, the central bank has interfered several times to either maintain the attractiveness of the currency to aid exporters or to attempt to weaken the currency to promote growth and inflation. Early in 2000, the Bank of Japan launched quantitative easing in an effort to increase inflation by promising to purchase substantial quantities of government bonds at predetermined interest rates. Multiple times, the program was improved to raise the quantity of bonds the central bank would purchase, add asset-backed securities to the mix, and later include stocks in the basket of assets the BoJ would purchase. Through a number of ETFs, the Bank of Japan is now the top holder of Japanese stocks and controls around half of the country’s bond market.
When the Bank of Japan modifies its monetary policy, the USDJPY price chart indicates a series of significant long-term reversals in the currency pair.
Talking up and down the Japanese Yen
Like other central banks, the Bank of Japan employs market communication as a crucial and effective instrument to control the value of the yen. The Bank of Japan gets more outspoken about what level it would be happy with as the currency approaches that level. The BoJ will attempt to “talk it down” if the currency becomes too costly, while they will “talk the currency up” if the currency becomes too cheap. A bank needs market credibility or a track record of acting on its beliefs in order to be effective in influencing the value of a currency.