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BOJ stands pat, sparks yen slide to 20-year low of 130 vs dollar

Gov. Kuroda defends loose monetary policy, accuses speculators

 Bank of Japan Gov. Haruhiko Kuroda said last week that the central bank should "persistently" continue its aggressive monetary easing, despite an expected rise in inflation driven by surging commodity costs. (Source photos by Koji Uema and pool photo)

TOKYO -- Bank of Japan Gov. Haruhiko Kuroda triggered a massive yen sell-off against the dollar on Thursday, first by underlining the bank's commitment to loose monetary policy, then by stating that a weak yen is positive for the Japanese economy.

As the steel industry, a business lobby and small business owners voice concern about the weak yen, Kuroda proclaimed: "There is no change to our assessment that the weak yen is positive for the Japanese economy."

He was speaking after the central bank earlier in the day decided to maintain its loose monetary policy despite growing inflationary pressure from costlier imports.

Rather than introducing flexibility to its monetary policy, the central bank in a statement reiterated its commitment to defending the 0.25% 10-year yield band around zero, saying it will conduct unlimited fixed-rate operations to buy 10-year Japanese government bonds at 0.25% every day.

The decision, announced after midday, sent the yen tumbling from about 128.68 to 130 against the U.S. currency, the first time it has reached that level in 20 years. The slide accelerated during the news conference that followed, sending the yen to a low of 130.95.

The yen hit 130 to the dollar after the Bank of Japan decided to stand pat. (Photo by Koji Uema) 

Kuroda declined to comment when asked by a reporter about the BOJ decision triggering the sell-off, saying, "It is not appropriate to comment on daily market movements."

Instead, he accused market players of causing volatility in the market.

"There have been all kinds of speculation over the BOJ's unlimited fixed-rate bond-buying operation, resulting in all kinds of movements in the market, even though we've made clear that we target the 10-year yield at zero, plus or minus 0.25%. We want to stop such speculation," Kuroda said.

"We want to stop unnecessary speculation causing unnecessary shifts in interest rates and unnecessary movements in the financial markets."

In a separately released economic outlook report, the board members offered a median forecast of 1.9% for inflation for the fiscal year that started this month, compared with 1.1% predicted three months ago, and 1.1% for the next fiscal year, versus the previously predicted 1.1%.

Economic growth is forecast at 2.9% for the current fiscal year, versus 3.8% predicted three months ago.

The meeting was held as inflationary pressure grows for commodities and a wide range of other goods, from fuel and food to apparel and appliances. In March, Japan's consumer inflation rose 0.8% from a year earlier, the biggest increase in 26 months. Inflation is widely expected to top 2% in April, when the effect of one-off cuts in mobile phone fees disappears.

The rising inflation has put the BOJ's monetary policy in sharp focus. The policy was supposed to help stimulate the economy, but it has sparked a sharp depreciation of the yen and exacerbated inflation caused by the COVID pandemic, the Russian invasion of Ukraine, and resulting disruptions to trade and economic activity.

Since the U.S. Federal Reserve started raising rates on March 16, the yen lost more than 10 yen against the dollar, as investors moved out of yen and into dollars for better investment yields. The Fed will hold its next policy meeting on May 3 and 4 and is widely expected to raise rates by half a point.

"The latest policy statement has left me with an impression that Kuroda has even hardened his stance," said Hideo Kumano, chief economist at Dai-ichi Life Research Institute.

The BOJ has found itself caught between a rock and a hard place. If it sticks to the loose monetary policy, it will exacerbate import-driven inflation. If it raises rates, it could hurt Japan's sluggish recovery from COVID.

The BOJ's announcement comes two days after Prime Minister Fumio Kishida announced a 6.2-trillion yen ($48 billion) package aimed at easing the pain of inflation to consumers. Many people think the BOJ's policy is undercutting the government's efforts, but Kuroda maintained that the BOJ's monetary stimulus and the government's fiscal support have "mutually complementary effects."

He cited the outlook report's forecast that consumer inflation unlikely to reach 2% in the next three years, and said, "This is not a time to think about an exit from the monetary stimulus. On the contrary, it underlines the need for sticking to easy monetary policy with patience."

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