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Japanese Yen Plunges to 24-year Low as Yield Control Policy Takes Center Stage

UTC by Tolu Ajiboye · 3 min read
Japanese Yen Plunges to 24-year Low as Yield Control Policy Takes Center Stage
Photo: Depositphotos

As the Japanese yen plunges to its weakest level since 1998, analysts ponder on how best to address this and other macroeconomic issues.

The Japanese yen has plunged to the lowest levels not seen in approximately twenty-four years, as authorities look to take corrective measures. In fact, as a precursor to formal intervention, the Bank of Japan reportedly conducted a foreign exchange check. This comes ahead of the governing Japanese bank’s rate decision meeting slated to take place later in the week. Also currently in focus, is whether the Bank of Japan may adopt a more aggressive rate hike stance akin to the US Federal Reserve. However, Swiss banking giant UBS doubts the possibility of Japan’s central bank making a switch from its current monetary stance. According to UBS, the likelihood of such a transition is especially low under current Bank of Japan governor Haruhiko Kuroda.

Furthermore, as the increasing rate differential continues to impact the strength of the yen, HSBC also staked its situational analysis. The leading British multinational banking platform says that Japan’s central bank will prioritize maintaining its yield curve control policy instead. Since the beginning of the year, the Japanese yen has plunged by around 25%.

Japan Yield Curve Control Policy

Analysts have already identified the Bank of Japan’s yield curve control (YCC) policy as a causative factor for the declining yen. This comes amid ongoing discussions centered around a physical intervention in the forex markets. Implemented back in 2016, the YCC policy caps 10-year Japanese government bond yields at around 0%. In addition, this strategy also offers to buy unlimited amounts of Japanese government bonds in order to maintain an implicit target cap of 0.25%.

Japan’s YCC policy seeks to bring inflation in the country to a 2% target. However, as it stands, inflation in the East Asian powerhouse has already exceeded this figure. On Tuesday, the Japanese government revealed that core inflation rose by 2.8% from a year ago in August. Furthermore, this trend represents the fastest growth in close to eight years where inflation exceeded the apex bank’s target. In addition, it also marks the fifth consecutive month for the same previously-mentioned inflationary development.

As the Japanese yen plunges amid rising inflation, HSBC’s Senior Asia FX Strategist Joey Chew explained that the governing bank would prioritize defending the YCC.  This decision opposes the idea of a currency intervention to stem the yen’s decline. Only after the Japanese finance ministry decides on this, will the central bank be able to implement and execute. In a recent media session, Chew explained, “The BOJ will be conducting bond purchases – theoretically unlimited – to maintain its yield curve control policy”. Furthermore, the HSBC Senior Asia FX Strategist also added, “Talk of FX intervention at this juncture may not have a material impact. Even actual intervention may only lead to a large but short-lived reaction.”

Asia-Pacific Shares on the Rise as Japanese Yen Plunges, Inflation Soars

As Japanese inflation soared, shares across the Asia-Pacific region also rose Tuesday. For instance, the Hong Kong Hang Seng index inched upwards by 1.36% in late trading, while the Hang Seng tech index rose 2.22%. Meanwhile, mainland China’s Shanghai Composite grew 0.22% to 3,122.41, with the Shenzhen Component gaining 0.686%. Furthermore, in Australia, the S&P/ASX 200 gained 1.29% to 6,806.40.

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