The current state of the Japanese economy and the Bank of Japan's monetary policy: impact on the dollar-yen exchange rate
Mr. Hideo Hayakawa, a former Bank of Japan director, expressed the view that while the Japanese economy is temporarily at a standstill, it is unlikely that the Bank of Japan will raise additional interest rates at the monetary policy meeting at the end of this month. The reduction in government bond purchases will be on a solid scale. It is conceivable that this trend in monetary policy will have a major impact on the dollar-yen exchange rate.
✔️ Current state of the Japanese economy
Economic activity is lacking in strength due to the effects of high prices, and certification fraud issues among automobile manufacturers have also had an adverse effect on production. If interest rates are raised in a hurry under such circumstances, there is a possibility that it will be regarded as responding by worrying about the depreciation of the yen, and there is a risk that it will cause market turmoil.
✔️ Bank of Japan's monetary policy and government bond purchase reduction
The Bank of Japan decided on a reduction policy for government bond purchases at the June meeting, and plans to compile a “specific reduction plan for the next 1-2 years or so” at the next meeting. It is expected that the reduction in government bond purchases will be solid. Coupled with the Ministry of Finance's yen buying intervention, it is expected to have the effect of suppressing the progression of yen depreciation.
・About specific reduction ranges
It is said that there is a possibility that the monthly purchase amount will gradually be halved from the current around 6 trillion yen to about 3 trillion yen in about 2 years. In this case, purchases are reduced by 36 trillion yen per year, but since the balance held by the Bank of Japan has swelled to about 580 trillion yen, it is expected that although long-term interest rates will rise, they will not rise that much.
✔️ Impact on the dollar to yen exchange rate [educational opinion 💡]
The Bank of Japan's monetary policy also has a direct impact on the dollar-yen exchange rate. Sudden interest rate hikes have the effect of suppressing depreciation of yen, but interest rate hikes at the current timing seem aggressive, so I think they should be avoided. As the depreciation of the yen progresses, it is expected that the dollar will rise.
・The outlook for the Japanese economy
There is no need to be pessimistic, and in the monthly labor statistics survey in May, prescribed salaries expanded 2.7% from the same month last year. It is said that a positive shift in real wages is also close. Thus, if summer economic indicators are good, additional interest rate increases may be an option at the September meeting. If additional interest rates are raised, there is a possibility that policy interest rates will reach the latter half of zero percent by the middle of next year, but it is expected that they will rise at a slow pace thereafter.
✔️ Summary While the Japanese economy is temporarily at a standstill, it seems unlikely that the Bank of Japan will raise additional interest rates at the end of this month. However, it is planned that the reduction in government bond purchases will be carried out firmly. Such monetary policy trends have an impact on the dollar-yen exchange rate, and in particular, it is necessary to consider the risk of yen depreciation progressing. Careful investment decisions are required while closely monitoring future economic indicators and Bank of Japan policy decisions.
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