The upcoming annual Jackson Hole central bank meeting this week has become a risk that the Bank of Japan cannot ignore. Bank of Japan officials fear that hawkish remarks possibly made by the Federal Reserve at this meeting could lead to another sharp sell-off of the Japanese yen, forcing Japanese authorities to intervene in the yen exchange rate.
Historically, the Jackson Hole meeting has been an opportunity for central banks to communicate future policy changes to the financial markets, with many central bank governors conveying extremely important information at past meetings. For example, in 2010, then-Federal Reserve Chairman Ben Bernanke proposed implementing quantitative easing policies, forcing then-Bank of Japan Governor Masaaki Shirakawa to call an emergency meeting to address the significant appreciation of the yen exchange rate.
The Bank of Japan is concerned that although financial markets expect the Federal Reserve to end its rate-hiking cycle soon, with energy and food prices remaining robust and inflationary pressures staying high, this might force the Federal Reserve to further raise interest rates or maintain high rate levels for a longer period, thus causing a continuous depreciation of the yen exchange rate.
The weakening of the yen not only draws close attention from Japanese monetary policy authorities but also poses political problems for the current Prime Minister, Fumio Kishida, as the ultra-loose monetary policy of the Japanese government is blamed for raising import costs. Masafumi Yamamoto, chief forex strategist at Mizuho Securities, remarks that Japanese authorities are not as worried about the yen's weakness as they were in September and October last year, but if the economy worsens impacting the government's approval ratings, the likelihood of Japan intervening in the exchange rate could increase.
Recently, although the yen exchange rate has once again breached the 145 level that triggered intervention last year, the Bank of Japan has not communicated any concern about the exchange rate to the market. There are chiefly two reasons why the Bank of Japan remains silent: firstly, the threshold for intervening in the yen exchange rate is higher under current conditions, and secondly, the depreciation of the yen has supported the growth of exports and inbound tourism services.
Three government officials familiar with Japan's monetary policy stated that if Powell makes hawkish comments at the central bank annual meeting, accelerating the depreciation of the yen exchange rate, the Bank of Japan might change its currently passive stance. Additionally, although Japanese authorities have declared that the decision to intervene is based on the speed of depreciation rather than the exchange rate level, a yen exchange rate breaking through the 150 barrier will increase the governing pressure on the Kishida government, thus raising the likelihood of Japan stepping up currency intervention.
Although Japan's core inflation rate has exceeded the Bank of Japan's 2% target for 16 consecutive months, the Bank continues to maintain its ultra-low interest rates and ultra-loose monetary policy due to concerns over a fragile economic outlook. Meanwhile, with high inflation, robust energy, and food prices backing, the Federal Reserve may further raise interest rates or maintain higher rate levels for a longer time. The divergence in monetary policies between the two central banks dominates the trend of the continuous depreciation of the yen exchange rate.
Daisaku Ueno, chief forex strategist at Mitsubishi UFJ Morgan Stanley Securities, stated that as long as the Federal Reserve does not stop its rate-hiking process and the Bank of Japan does not abandon its ultra-loose policy, even if the Japanese authorities intervene, it is unlikely to reverse the trend of continuous depreciation of the yen exchange rate.
