Weak Yen Triggers Inflation Red Line: Bank of Japan May Be Forced to Hike Rates Early

Title: “Yen’s Sharp Decline Forcing the Central Bank to Hike Rates Early? Report: Officials More Concerned About Weak Exchange Rate’s Impact on Inflation”

Author: Ye Huiwen

Source:

Repost: Mars Finance

Japanese central bank officials are increasingly concerned about the potential impact of a weak yen on inflation, a trend that could significantly disrupt the future rate hike path. According to informed sources to Bloomberg, although the Bank of Japan (BOJ) may keep interest rates unchanged at the upcoming policy meeting, exchange rate factors might prompt a reassessment of the timing of rate hikes, possibly forcing an earlier move.

Bloomberg reports that BOJ officials believe the influence of a weak yen on prices is strengthening, especially as companies become more inclined to pass rising input costs onto consumers, potentially intensifying inflationary pressures. Although the BOJ just raised the benchmark interest rate last month and has not set a fixed borrowing cost path, if the yen continues to weaken, policymakers may consider bringing forward the rate hikes initially scheduled for later.

Currently, the general expectation among private economists is that the BOJ will raise rates approximately every six months, meaning the next move could occur this summer. However, sources to Bloomberg indicate that officials prefer to implement policy adjustments promptly rather than be overly cautious, suggesting that the previously anticipated rate hike rhythm faces uncertainty. Following this news, the yen against the dollar briefly fell to around 158.68 before rebounding to 158.33. At press time, the yen was at 158.55 against the dollar.

January Meeting Expectation: Hold Rates Steady

The BOJ will announce its latest policy decision on January 23. Sources told media that officials currently believe maintaining the rate at 0.75% is appropriate, a level that has reached a 30-year high. Although the overall stance remains on hold, the committee will continue monitoring economic data and financial market changes until the last minute to make a final decision.

The focus of this meeting will be on how the central bank assesses the impact of the yen on potential inflation. Bloomberg sources say that, given inflation trends are approaching the BOJ’s 2% target, officials will closely watch how exchange rate fluctuations influence household and corporate price expectations.

Exchange Rate Transmission Mechanism Under Scrutiny

A depreciating yen typically increases inflationary pressures by raising import costs and also boosts export profits. However, some officials point out that as the yen continues to weaken, its negative impact on the economy may be increasing. They believe the BOJ still has room to raise rates further, with the key being timing the policy adjustments appropriately.

The Japanese business community has also become more vocal on exchange rate issues. Yoshinobu Tsutsui, president of the Japan Business Federation, Japan’s largest business lobbying group, made a rare comment this week, calling on the government to intervene in currency markets to prevent excessive yen depreciation, describing recent yen movements as “a bit overdone.”

Market Background and Political Factors

Despite the BOJ raising the benchmark rate on December 19, the yen remains weak against the dollar. News that Prime Minister Fumio Kishida will hold early elections next month has further pressured the yen, which fell to an 18-month low this week.

Bloomberg data shows that the 10-year average exchange rate of the yen against the dollar is 123.20, and over the past two years, the yen has fluctuated roughly between 140 and 161.95. Although the yen rebounded slightly after hitting an 18-month low earlier this week amid increased warnings from monetary authorities, the overall depreciation trend continues to exert ongoing pressure on the BOJ’s decision-making.