Bank of Japan officials are increasingly focusing on the potential inflationary impact of the yen's weakness, a development that could substantially influence the future path of interest rate hikes. According to sources familiar with the matter, while the BOJ is likely to keep interest rates unchanged at its upcoming policy meeting, exchange rate factors may prompt it to reassess the timing of hikes, potentially forcing earlier action than previously anticipated.
The report indicates that BOJ officials believe the influence of a weak yen on prices is intensifying, particularly as companies become more inclined to pass rising input costs on to consumers, which could further exacerbate inflationary pressures. Although the BOJ just raised its benchmark rate last month and has not set a predetermined path for borrowing costs, policymakers might consider moving forward a hike originally expected for later if the yen continues to depreciate.
Currently, the consensus among private economists is that the BOJ will raise rates at a pace of about once every six months, suggesting the next move could occur this summer. However, sources pointed out that officials lean towards implementing policy adjustments in a timely manner rather than being overly cautious, indicating that the market's previously expected pace of hikes is now subject to change. Following this news, the yen initially fell to around 158.68 against the US dollar before recovering to 158.33; as of this writing, the yen was trading at 158.55.
The focus of the January meeting, scheduled for January 23, will be on how the central bank assesses the yen's impact on potential inflation. Sources stated that, given inflation trends are already close to the BOJ's 2% target, officials will closely monitor how exchange rate fluctuations alter the price expectations of households and businesses.
A weak yen typically increases inflationary pressure by raising import costs, while also boosting exporters' profits. However, some officials noted that as the yen remains persistently weak, its negative effects on the economy may be increasing. Officials believe the BOJ still has room to continue raising rates, with the key challenge being the timing of such policy adjustments.
Voices from Japan's business community on the currency issue are also becoming more frequent. Yoshinobu Tsutsui, head of Keidanren (Japan Business Federation), the country's most powerful business lobby, made a rare comment this week calling for government intervention to stop the yen's excessive depreciation, describing recent currency movements as "a bit too much."
Despite the BOJ's rate hike on December 19, the yen has remained weak against the US dollar. The currency slid further to a new 18-month low this week, influenced by news that Prime Minister Takaichi Sanae will call a snap election next month.
Data compiled by Bloomberg shows the 10-year average exchange rate for the yen against the US dollar is 123.20, while over the past two-plus years, the rate has fluctuated roughly between 140 and 161.95. Although the yen rebounded slightly after touching an 18-month low earlier this week, following strengthened warnings from monetary authorities, the overall depreciation trend continues to exert persistent pressure on the central bank's decision-making.
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