A continuation of Japanese monetary policy – Commerzbank

News came that Bank of Japan Governor Kazuo Ueda reiterated that further rate hikes are likely to follow as long as the BoJ’s outlook is realised. He pointed out that even after the July rate hike, real interest will remain significantly negative, which will continue to support the real economy, notes Chris Turner, FX strategist at Commerzbank.

The yen is likely to come under depreciation pressure again

“The real interest rate is clearly negative. Comparing this to the rest of the G10, it is clear that Japan’s real interest rate is by far the most negative, hence the most expansionary. All other central banks have responded to the inflationary shock of recent years by sharply raising interest rates. Inflation is now falling around the world, so their real interest rates are turning positive. Only the BoJ is known to have missed the cycle.”

“Japanese inflation is mainly externally driven, meaning that a self-sustaining inflation process has not yet begun. From this point of view, there is no need to tighten monetary policy. Nor is growth strong enough to justify tightening the reins. Japan’s GDP has only recently returned to pre-pandemic levels. That makes it the worst performer in the G7. Therefore, the current real interest rate does not appear to be expansionary in a way that is sufficiently supportive of the real economy.”

“In the short term, it doesn’t matter to the yen whether rate hikes are fundamentally justified or not. In any case, the yen is benefiting from the interest rate differential, as we saw on Tuesday after the announcement. In the medium term, however, if the BoJ unnecessarily ensures that inflationary pressures disappear, while at the same time putting pressure on the real economy with tighter monetary policy, the yen is likely to come back under medium-term depreciation pressure. “