The yen continued to weaken as the Bank of Japan decided to engage in open market manipulation to purchase government bonds at a specified rate to contain long-term interest rate rises and continue financial easing. In the meantime, the US-Japan interest rate gap and Japan’s current account deficit have encouraged the yen, but on the 28th, the yen fell 3 yen per dollar a day in the hope that the interest rate difference could widen, the first time in six years and seven months. It also recorded 125 yen per dollar. In the Seoul foreign exchange market on the 29th, the won-yen fiscal exchange rate fell to 980 won per 100 yen for the first time in three years and three months.
Some predict that the US will tolerate the weak yen, which it has reacted sensitively in the past, and will not intervene in the market in order to ease its own inflation.
According to the Nihon Keizai Shimbun on the 29th, the Bank of Japan announced on the 28th that the 10-year Treasury bond yield rose to 0.25% in the bond market and announced that it would launch a ‘fixed price operation’ (open market manipulation) for several days to prevent a rise in long-term interest rates. The limit-price operation is a method of purchasing government bonds at a specified interest rate. For example, if the Bank of Japan buys government bonds at 0.25%, the banking and private sectors have no advantage in selling them to other investors at an interest rate higher than 0.25% (cheap price), which has the effect of suppressing interest rate rise.
In 2016, the Bank of Japan decided on a monetary easing policy to purchase government bonds in order to manipulate long and short-term interest rates, leading to a short-term policy rate of -0.1% and a 10-year government bond yield of around 0%. In March last year, the tolerance range for long-term interest rate fluctuations was expanded from ±0.2 percentage points to ±0.25 percentage points, and a large-scale easing policy has been maintained.
With the announcement of the Bank of Japan, expectations were formed in the market that the interest rate gap between the US and Japan would widen further. It is the first time since August 2015 that the yen has reached 125 yen per dollar. Bank of Japan Governor Haruhiko Kuroda remarked at the National Assembly in 2015 when the yen fell to the level of 125 yen to the dollar, “It is unlikely that there will be any further yen appreciation.” 125 yen per dollar used to be called the “Kuroda Line,” but this time it came close to the Kuroda Line.
One of the reasons for the recent weakness in the yen is the difference in interest rates between the US and Japan. As the interest rate gap between the US and Japan widened due to the Fed’s rate hike, the demand for the yen decreased and the purchase of the dollar increased. While the Fed is expected to raise rates further, the Bank of Japan is maintaining its monetary easing policy, which could widen the interest rate gap between the two countries, which inevitably affects the value of the yen.
Unlike the past, when the US reacted sensitively to the yen, it is analyzed that this time it will tolerate the yen and will not intervene in the market. While the high inflation rate has recently emerged as a problem, the weak yen has the effect of lowering import prices.
The Wall Street Journal (WSJ) predicted on the 28th that the US authorities will continue to allow the yen to weaken as inflation nears 8%. The WSJ reported that the US Treasury Department’s December exchange rate report showed no signs of intervening in the foreign exchange market, saying that there were no concerns about the yen’s weakness.
[도쿄 = 김규식 특파원 / 신윤재 기자]
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