Two weeks ago the Bank of Japan met and hiked its key rate to 1%, the highest level in 31 years. This week the Japanese yen hit its lowest level against the U.S. dollar in 39 years. So why is another rate hike by the BOJ, which left its policy door wide open to another rate hike this year, met by a selloff that pushed the yen to dollar rate below the 160 level amid expectations it could weaken further?
Enter Masaaki Yoshimori, an economist at the McCourt School of Public Policy at Georgetown Universty, who was previously a fellow at the James A. Baker III Institute for Public Policy at Rice University.
Yoshimori emphasizes that the interest rate differential between the US and Japan is a primary factor behind the yen’s depreciation. “The US and Japan interest rate differential remains the dominant driver of the yen.” But he stresses that markets “don’t trade today’s interest rate,” but are trading what they expect to see trading tomorrow.
He further explains that market participants are forward-looking, focusing on expectations rather than current rates. The slow pace of normalization by the Bank of Japan (BOJ) compared to the US Federal Reserve is seen as a key reason for the yen’s continued weakness.
And he suggests that while interventions may provide temporary relief, they cannot alter the fundamental drivers of currency movements unless accompanied by broader policy changes.
So dive in and hear why Masaaki says U.S. interest rate expectations often have a greater influence than Japanese rates do on the dollar/yen exchange rate.
Spoiler alert: he says this doesn’t mean that the BOJ doesn’t matter. “I separate the two,” he says. “U.S. policy largely determines the direction of the yen and Japanese data determine how sustainable it will be in the end.”
The Fed and Policy and Japan 00:01:21:02
So this is such a talk about policy. Maybe also some of what is driving the Fed. Sure. Let’s talk about it. Very, very good question is a kind of hot topic. The US and Japan interest rate differential remains the dominant driver of the Yen. But markets don’t trade on today’s interest rate, they trade on tomorrow’s expectation. As long investors expect the BOJ to normalize policy only very, very, gradually. I think one time this year.
Expectations and communications are key 00:02:48:04
Will the Fed get interest rates higher? More hiking? This is another expectation. The data is likely to demand a pause before a change. The BOJ needs credibility and clear communication to anchor monetary policy expectations. For example raising interest rates or 2% <inflation>. I’m a strong base inflation expectations keeper. 2% now is currently 2.5%. So like there is a more needed communication.
US to raise rates faster than Japan 00:03:53:06
Hopefully, yes. A high priority to hike rates and slow progress on inflation. This is a key point. For example, most successful person is Mr. Yen, Sakakibara. But intervention cannot change the underlying fundamentals as long as Japanese interest rates remain much lower than overseas, capital, continues to flow abroad Intervention can buy some, time, but it cannot permanently change the direction of the exchange rate.
Fiscal jolt for Japan? 00:04:40:23
I hope Japanese fiscal policy, includes consumer tax of from 10% to 1% next year.
Is 170 possible? 00:05:16:19
Yes, maybe. I also I would describe 170 as a potential scenario, but no one can predict the exact exchange rate. However, this is a technical overly technical line with a psychological barrier at about 162 or 163 as well. It’s really a challenge to get to 170. So its difficult to do; my advice to the BOJ is don’t talk about it, just do it. They could even signal intervention. But this would need a coordinated intervention.
How important is Fed policy to the BOJ? 00:06:36:00
Yes. That’s a very good question. Kevin Warsh, congratulations! He will become the greatest Fed chair. Okay great. In fact the US interest rate expectations are already in global data and often have a greater influence than Japanese policy on the exchange rate. However, it does not mean that BOJ does not matter.
It takes two 00:07:17:20
I separate the two. US policy largely determines the direction of the yen and Japanese data determine how sustainable the move will be in the end..
In Japan interest rates matter most 00:07:47:07
Is actually so it’s a fact the interest rate decision is more and more powerful for the BOJ policy.
Intervention is not enough 00:08:25:03
Yeah, it’s intervention is not enough. I don’t believe a Japanese can solve a challenge alone. So also I mentioned Japanese fiscal policy with a stimulus package today, the exchange rate issue, is a deflector. Broader global imbalance, for example, are from Korea, Taiwan, and China. So that’s why I have a proposal, a strategic coordination for currencies. Set the framework and combine exchange rate coordination with structure reforms.
Use the exchange rate to create remedies 00:09:11:18
You need a macroeconomic policy coordinator. The object is not a simple stable exchange date. It’s to use it to correct the imbalance that increasingly arises due to trade tensions, protectionism, and geopolitical conflict. Exchange rate and data policy should become a part of economic diplomacy.
What matters most to the BOJ today 00:10:18:21
Yeah, it’s a great question. All of them (growth, inflation, and the yen). Markets trust the central bank. Inflation expectations remain anchored. Financial markets remained ordinary and extended volatility has become more manageable. But how? Fed communication, not transparency, but optimal communication, is used to diminish noise. I strongly agree with that approach. So, this idea on the other hand has the BOJ increasingly managing information. That’s a simple change. But since particular markets share information, they need wider guidance.
PM Takaichi is pro-growth 00:11:50:06
I think that’s a yes. So, to some extent, pressure I do I think a political signal exists. But they are very different from the past government or central bank directions. What to do instead of the implicit growth protecting households and appointing the time of deflation. Markets naturally interpret those messages. Wow. So that the danger is that there is not communication between the government and the BOJ.
Complex forces 00:12:38:18
It is a fact that markets and monetary policy are driven by political, economic, economic condition by BOJ.
Coordinated currency realignments 00:13:24:23
All right. Yeah, it’s not exactly, but it’s the Plaza Accord that was designed for global economy of 1985 by James Baker. So, Secretary Baker, today is far more interconnected… digital currencies like stablecoin… this is a different situation. It includes structured data, financial cooperation and macroeconomic policy. The object is not the creation. According to more complicated system the US dollar is a stronger dollar and we keep a payment system like that. It is a bit newer framework for the realities of 21st century. This is my idea.
Masaaki Yoshimori is an economist. He was born in Ashiya and grew up in Kuwana, Japan. He belongs to the McCourt School of Public Policy, a constituent school of Georgetown University in Washington, DC. He previously served as a fellow in International Economics at the James A. Baker III Institute for Public Policy at Rice University in Houston, Texas. Yoshinori’s research spans a broad spectrum of critical issues in global economics, including monetary policy, exchange rate policy, financial regulation, macroeconomics and the intersections of climate change with economic systems. Additionally, his work delves into the political economy, exploring the impacts of globalization on the monetary system and the evolving challenges faced by global financial institutions.
