Government panelists say BOJ’s yield cap causes yen ‘negative spiral’ to fall

© Reuters. Yen coins and banknotes are seen in this illustration image taken on June 16, 2022. REUTERS/Florence Lo/Illustration

by Leika Kihara and Yoshifumi Takemoto

TOKYO (Reuters) – The Bank of Japan’s determination to maintain ultra-low borrowing costs is leading to a “negative spiral” of yen weakness, underscoring the need to adjust its yield-cap policy, Yuri Okina, a member of Japan’s main government panel, said, adding Criticism of Bank of Japan policy.

Bank of Japan Governor Haruhiko Kuroda has vowed to defend the bank’s 0.25% cap on 10-year Japanese government bond (JGB) yields to support the economy with extremely low interest rates.

The policy divergence between the Bank of Japan and the Federal Reserve is aggressively raising interest rates, and the yen fell to a 24-year low of 136.71 against the dollar on Wednesday. It rebounded slightly to around 135.46 on Thursday afternoon.

“The recent moves have been very dramatic and problematic. The yen could weaken further as the Japan-U.S. spread widens,” said Okina, a former BOJ official.

“We are seeing a negative spiral and Kuroda’s remarks emphasizing the need to defend the 0.25 percent cap is accelerating the yen’s decline,” she told Reuters on Wednesday.

To avoid the yen falling further, the Bank of Japan may adjust its message and put more emphasis on the yen’s movements when guiding monetary policy, she said.

Okina said there was also room to fine-tune the Bank of Japan’s yield curve control (YCC) policy and allow longer-term interest rates to move more flexibly around its target.

“It’s hard to raise interest rates significantly now because Japan has to keep its economy from falling into stagflation,” she said.

“But at some point in the future, the BOJ needs to consider allowing the 10-year yield to move in a wider range, rather than fixing it” around zero, Okina said.

Under YCC, the Bank of Japan has set its short-term interest rate target at -0.1% and the 10-year JGB yield around 0%. It also pledged to buy an unlimited amount of 10-year JGBs on a daily basis to defend its 0.25% ceiling near its 10-year yield target.

Kuroda has repeatedly said the Bank of Japan does not target the exchange rate when guiding monetary policy, ignoring calls by some lawmakers to adjust the YCC to counter the yen’s fall.

Some analysts and opposition lawmakers have recently escalated their criticism of the Bank of Japan’s ultra-easy policy, accusing it of causing an unwelcome plunge in the yen, raising the cost of imported fuel and raw materials.

Okina is currently a member of a government panel discussing Prime Minister Fumio Kishida’s growth strategy. She is also director of the Japan Institute, a private think tank.

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