3. Japanese Yen Hits 30-Year Low as BOJ Maintains Dovish Stance
The Japanese yen has reached its weakest levels in over three decades, trading near 150 yen to the U.S. dollar in 2024. This decline reflects the significant divergence between Japan’s ultra-loose monetary policy and the tightening stances of other major central banks, such as the U.S. Federal Reserve and the European Central Bank. Despite the yen’s sharp depreciation, the Bank of Japan (BOJ) has continued to maintain its dovish policies, citing weak domestic inflation and the need to support economic recovery.
1. Bank of Japan’s Ultra-Loose Monetary Policy
The BOJ has remained one of the last major central banks to stick with an ultra-accommodative monetary policy. While other central banks have been raising interest rates to combat inflation, the BOJ has kept its key interest rates in negative territory and continued with its massive bond-buying program, known as yield curve control (YCC). Under YCC, the BOJ aims to keep the yield on 10-year Japanese government bonds near 0%, which effectively caps long-term interest rates and maintains extremely low borrowing costs.
Governor Kazuo Ueda, who took office in 2023, has signaled that Japan is not yet ready to exit its ultra-loose policy. While inflation in Japan has been rising, it remains below the BOJ’s 2% target on a sustainable basis. Ueda has reiterated that tightening monetary policy prematurely could stifle Japan’s fragile economic recovery, particularly in light of global economic uncertainties.
2. Weak Domestic Inflation and Wage Growth
One of the key reasons for the BOJ’s dovish stance is Japan’s persistently low inflation. Unlike the U.S. and Europe, where inflation surged to multi-decade highs due to supply chain disruptions and energy price shocks, Japan’s inflationary pressures have been more subdued. Although inflation briefly exceeded the BOJ’s 2% target in 2023, much of that was driven by temporary factors, such as higher import costs due to the weaker yen and global commodity price spikes.
However, core inflation, which excludes volatile food and energy prices, has remained weak, indicating that Japan’s domestic inflation is not strong enough to justify tightening. Another major concern for the BOJ is wage growth, which has been sluggish for years. Without significant wage increases, Japan is unlikely to achieve sustainable inflation, which is why the BOJ is hesitant to shift toward a more hawkish stance.
3. Yen Depreciation and its Impact on the Economy
The sharp depreciation of the yen has been one of the most notable outcomes of the BOJ’s dovish stance. In 2024, the yen has fallen to levels not seen since the early 1990s, with the USD/JPY pair nearing 150. The yen’s weakness is largely a result of interest rate differentials, as higher yields on U.S. Treasury bonds have attracted capital away from Japanese assets. The growing divergence between the BOJ’s policies and those of other central banks has put downward pressure on the yen, making it one of the worst-performing major currencies this year.
The weaker yen has had a mixed impact on the Japanese economy. On the positive side, a weaker currency has boosted Japan’s export competitiveness, as Japanese goods become cheaper for overseas buyers. Major Japanese exporters, such as Toyota and Sony, have benefited from this, posting higher profits in their overseas operations. However, the benefits of a weaker yen have been somewhat offset by global economic uncertainty and weakening demand from key trading partners, particularly China and Europe.
On the negative side, the yen’s depreciation has raised import costs, particularly for energy and raw materials, which Japan relies heavily on. This has contributed to higher input costs for Japanese businesses and squeezed household budgets, as imported goods have become more expensive. The weak yen has also diminished the purchasing power of Japanese consumers, who face higher prices for essential goods and services.
4. Market Intervention and the BOJ’s Response
The yen’s decline has prompted speculation about potential government intervention in the foreign exchange market. In late 2023, Japan’s Ministry of Finance intervened in the forex market to support the yen by selling U.S. dollars and buying yen. However, the impact of these interventions has been limited and short-lived, as the underlying factors driving the yen’s weakness—namely, the BOJ’s dovish stance and the interest rate gap between Japan and the U.S.—remain unchanged.
Governor Ueda has stated that while the BOJ is monitoring the yen’s movements closely, the central bank’s primary focus remains on achieving sustainable inflation and supporting economic recovery. The BOJ has resisted calls to raise interest rates to defend the yen, arguing that such a move would be premature given Japan’s economic conditions.
5. Global and Domestic Pressures on the BOJ
The yen’s decline has raised questions about the BOJ’s long-term policy direction. On the global stage, Japan’s accommodative stance has stood in stark contrast to the monetary tightening seen in other major economies. This divergence has fueled capital outflows from Japan, exacerbating the yen’s depreciation and putting pressure on the BOJ to reconsider its policies. Some analysts argue that if the yen continues to weaken significantly, it could trigger more aggressive intervention or even a policy shift from the BOJ.
Domestically, there is increasing pressure on the BOJ to address the yen’s impact on inflation and consumer prices. While the weaker yen has been a boon for exporters, it has hurt consumers by making imports more expensive, contributing to rising costs for households.
