The rapid depreciation of the Yen is touching the nerves of the Japanese authorities once again. On the back of rising 10-year US Treasury yield to the highest level in sixteen years, larger interest rate differential between the US and Japan has weakened the Yen to around USDJPY=149 (Chart 1).
Despite of the falling Yen, the Bank of Japan (BoJ) decided in favor of the status quo at the September monetary policy meeting last Friday. The main reason for such decision was made clear by Governor Ueda before the meeting: nominal wage growth has continued to stagnate (Chart 2), which hampers the BoJ’s confidence to achieve its sustainable 2% inflation target. Unless wages increase sustainably, the BoJ is convinced that the current inflation episode in Japan will be transitory, as non-manufacturers complete their pass through of higher import costs to their customers*.
However, every decision has consequences, even the status quo. If the BoJ remains accommodative to support higher nominal wages, a further Yen depreciation could result into another round of increase in import prices. These developments would delay the recovery in real wages which have declined by more than -2.0% YoY, containing private consumption and, thereby, economic growth. Lower growth could in turn reduce corporate profits and discourage companies to lift nominal wages. In other words, the BoJ may be sitting in front of a vicious circle if the Yen continues to weaken.
With this background, the spotlight is on the Ministry of Finance (MoF) and its potential decision to intervene in the forex market to prop up the Yen. The MoF stepped into the foreign exchange market when the Yen was weakening rapidly above USDJPY=145 last year in September. With a lingering possibility of an additional rate hike by the Fed, higher US Treasury yields have recently further weakened the Yen. Therefore, the MoF might come back again to the Yen rescue but the impact of such intervention can only be temporary if yield differentials remain so wide in favor of US Treasuries and, thus, the US dollar.