MNI POLICY: Yen Fall Unlikely To Drive Swift Japanese Action

The yen’s slide to an eight-month low against the dollar is unlikely to prompt a rate hike or Japanese authorities to intervene in FX markets immediately, as the weaker currency helps mitigate impacts of U.S. trade policy on exporters – a key driver of the economy, MNI understands.

The Bank of Japan is likely to stick to its “no rush” stance, despite the weak yen pushing up import prices and household living costs amid heightened uncertainty over the effects of U.S. trade policy on the global and domestic economies. (See MNI POLICY: BOJ Sees No Need To Rush Rate Hikes)

The dollar traded around JPY152.50 on Thursday after touching JPY153 on Wednesday, the highest since mid-February, up from about JPY147 last Friday.

The government, though increasingly concerned about public frustration over rising prices, currently has few effective tools beyond direct currency action. While the U.S. might look favourably on yen-buying operations, such measures carry complex domestic economic implications, making them difficult to implement.

POLITICAL UNCERTAINTY

The appointment of Liberal Democratic Party leader Sanae Takaichi as Japan’s next prime minister is likely to be delayed at least until Oct 20, as coalition partner Komeito hesitates to maintain the alliance amid concerns about her policies. The delay could threaten the passage of a supplementary budget and postpone planned meetings with world leaders, adding to the yen’s weakness alongside fiscal concerns.

BOJ officials are closely monitoring whether the weak yen raises household inflation expectations, its impact on import prices, and how the government responds to growing discontent over higher living costs. 

In 2024, import prices in yen terms rose sharply from April (+7.0%) through July (+10.7%) as the yen weakened from JPY157 to JPY161, prompting the BOJ to raise its rate to 0.25% from 0% on July 31, after which the yen strengthened to JPY146. 

However, the latest data show import prices fell 3.9% y/y in August, marking a seventh straight decline after a 10.3% fall in July.

The Federal Reserve, meanwhile, is in the process of lowering its policy rate amid rising downside risks to the labour market, though inflation has picked up slightly due to tariffs. Should market expectations of Fed rate cuts fade or a renewed tightening path emerge, the yen could weaken sharply – a scenario that would pose significant challenges for the BOJ and the government and may warrant swift action.