"BOJ Interest Rate Hike Unlikely to Resolve Yen Weakness"

"The Interest Rate Gap Is Too Large for the Yen Weakness to Reverse"

As the Bank of Japan (BOJ) prepares for its monetary policy meeting on the 30th and 31st of this month, there are forecasts that even if the authorities raise interest rates, it will not be easy to boost the value of the yen.

On the 14th (local time), Bloomberg reported that the yen has depreciated by 11% this year, leaving open the possibility that the BOJ may raise interest rates at the July meeting.

BOJ Building Photo by Reuters Yonhap News

The market is focusing on the upcoming release of Japan's Consumer Price Index (CPI) this week. Japan's inflation rate for June is expected to be 2.9%, which significantly exceeds the BOJ's target of 2%. Additionally, the U.S. Federal Reserve (Fed) has slowed the pace of interest rate cuts, widening the interest rate gap between the U.S. and Japan, which continues to weaken the yen. The market expects the BOJ to raise interest rates at the July meeting.

Jiro Goto, Head of Foreign Exchange Strategy at Nomura Securities, said, "If the yen continues to weaken until the July meeting, the Japanese government should consider reducing the pace of bond purchases while also contemplating an early rate hike."

Japan raised interest rates in March for the first time in 17 years, ending negative interest rates after 8 years and guiding short-term policy rates to 0?0.1%. However, the interest rate gap between the U.S. and Japan remains wide, and the yen continues to weaken. At the end of last month, the yen-dollar exchange rate surpassed 161 yen, marking the lowest level in 37 years and 6 months. An increase in the yen-dollar exchange rate indicates a decline in the yen's value.

Bloomberg estimated that following the U.S. June CPI release on the 11th, when the yen-dollar exchange rate surged about 4 yen, Japanese authorities appear to have injected approximately 3.5 trillion yen (about 30.6068 trillion KRW) into foreign exchange market intervention. The Nihon Keizai Shimbun (Nikkei) also suggested the possibility of intervention by authorities in the range of 3 to 4 trillion yen. The authorities stepped in as the yen's weakness persisted.

Bloomberg stated that while the BOJ raising interest rates could provide room for a yen rally, it may still not be enough to break out of the downward trend. According to Goto, if the BOJ raises rates by 15 basis points (1bp = 0.01 percentage points), the yen's value could rise by 2 to 3 yen.

Mitul Kotecha, Head of Foreign Exchange and EM Macroeconomic Strategy at Barclays, said, "Expectations are rising that the BOJ will raise interest rates this month due to the yen's weakness, but I believe the interest rate gap is still too large for a sustained reversal (yen appreciation) to occur."