A former chief cabinet secretary, Katsunobu Kato, said on Monday that Japan is seeing conditions fall in place for the central bank to normalize monetary policy. A ruling party heavyweight underscored growing political support for further interest rate hikes, per Reuters.
Key quotes
“Japan is seeing conditions fall in place for the central bank to normalize monetary policy.”
“Bank of Japan must keep a close eye on economic conditions and coordinate carefully with the government in working out when to raise rates.”
"Japan is shifting to an era where prices and wages rise, from one where both barely moved.”
"It's therefore natural for monetary policy to revert to the original style in which interest rates move in positive territory reflecting market function.”
"Key to the decision on whether to actually raise interest rates is Japan's economy, especially consumption, which isn't necessarily strong."
Market reaction
At the press time, USD/JPY is adding 0.01% on the day to trade at 155.77.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential 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 directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The current BoJ ultra-loose monetary policy, based on massive stimulus to the economy, has caused the Yen to depreciate against its main currency peers. This process has exacerbated more recently due to an increasing policy divergence between the Bank of Japan and other main central banks, which have opted to increase interest rates sharply to fight decades-high levels of inflation.
The BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supports a widening of the differential between the 10-year US and Japanese bonds, which favors the US Dollar against the Japanese Yen.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.
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