TOKYO -- While Bank of Japan officials see no grounds for Donald Trump's accusation of currency devaluation, they still worry that the bank's unique measure to control long-term rates could become the next target as the president continues his rhetorical battles.
"I have no idea what he is saying," said one baffled BOJ official after learning about the criticism Trump leveled against the central bank.
Bond investors seem similarly perturbed. Yields on 10-year Japanese government bonds temporarily rose 0.025 percentage point Thursday, hitting 0.115% -- the highest since the BOJ announcement of negative interest rates Jan. 29, 2016. The climb also reflects market anxiety over whether the central bank will continue buying up JGBs at the current pace.
BOJ Gov. Haruhiko Kuroda refuted Trump's accusation in the Diet on Wednesday, saying Japan's monetary policy is designed to defeat persistent deflation and not to keep the yen weak. "We discuss monetary policy every time Group of 20 finance ministers and central bankers meet," he said. "It is understood among other central banks that [Japan] is pursuing monetary easing for price stability."
In fact, U.S. monetary policy is chiefly responsible for the yen's depreciation against the dollar. The Federal Reserve in 2015 switched to a tightening mode after keeping interest rates near zero for years, judging quantitative easing to have worked its expansionary magic on the economy. The gap between American and Japanese rates is now the widest it has been in around seven years, encouraging heavier buying of the dollar -- the higher-yielding currency -- than the yen.
Yet concerns remain inside the BOJ. "We may have had trouble instituting yield curve controls if we had tried to do so after Trump took office," an official said. The policy, in place since September, aims to keep long-term interest rates around zero and so could leave the bank open to accusations of artificially widening the interest rate spread with the U.S. Both BOJ insiders and market players will keep a close eye on how talks between Trump and Japanese Prime Minister Shinzo Abe play out Feb. 10.