Financial and capital markets remain volatile

VaselineAugust 28, 2024

0 2 minutes read

Bank of Japan (BoJ) Vice Governor Ryozo Himino said on Wednesday that financial and capital markets remain volatile and the Japanese central bank must monitor these developments with utmost vigilance.

Key quotes

Financial and capital markets remain volatile.

The BoJ must monitor these developments with the utmost vigilance.

The BoJ also plans to scrutinize the impact of these markets.

Developments at home and abroad have an impact on the output of economic activity and prices, the risks surrounding the outlook and the degree of confidence in the outlook.

The BoJ will adjust the degree of monetary accommodation if it has growing confidence that its outlook for economic activity and prices will be realized.

It will lead monetary policy as appropriate to achieve the 2% inflation target in a sustainable and stable manner, communicating closely with market participants and other stakeholders.

They need to closely monitor developments in recent market volatilities, including weaker stocks and a stronger yen.

The BoJ should continue its efforts to refine its approaches to estimating the neutral rate for Japan and use the results as a useful benchmark.

But the BoJ has no choice but to chart a way forward by examining how the economy and prices respond as it conducts monetary policy.

The neutral interest rate estimate would not automatically point to the correct policy path for Japan, at least at this point.

Our baseline scenario for fiscal 2025, 2026 envisages a reasonably balanced state in which the inflation rate is consistent with the price stability target and economic growth is slightly above cruising speed.

The recent appreciation of the yen may alleviate the rising import costs and profit squeeze that many small and medium-sized firms are currently facing.

But a stronger yen may reduce the yen-denominated profits of Japan’s export industries and multinationals.

Market reaction

At the time of writing, USD/JPY is trading 0.13% higher on the day to trade at 144.15.

Frequently Asked Questions about the Japanese Yen

The Japanese Yen (JPY) is one of the most traded currencies in the world. Its value is largely determined by the performance of the Japanese economy, but more specifically by Bank of Japan policy, the difference between Japanese and US bond yields, or risk sentiment among traders, among other factors.

One of the Bank of Japan’s mandates is currency control, so its moves are key for the yen. The BoJ has intervened directly in currency markets on occasion, generally to depress the yen, although it refrains from doing so because of the political concerns of its main trading partners. The BoJ’s current ultra-loose monetary policy, based on massive stimulus to the economy, has caused the yen to depreciate against its major peers. This process has been exacerbated more recently by a widening policy divergence between the Bank of Japan and other major central banks, which have opted to raise interest rates sharply to fight decades-high levels of inflation.

The BoJ’s stance of sticking to ultra-loose monetary policy has led to increased policy divergence with other central banks, particularly the US Federal Reserve. This supports a widening of the spread between US and Japanese 10-year bonds, which favors the US dollar against the Japanese yen.

The Japanese yen is often seen as a safe investment. This means that during periods of market stress, investors are more likely to put their money into the Japanese currency due to its supposed reliability and stability. Troubled times are likely to strengthen the value of the yen against other currencies considered riskier to invest in.

VaselineAugust 28, 2024

0 2 minutes read

Key quotes

Market reaction

Frequently Asked Questions about the Japanese Yen

Vaseline

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