The Yen’s Recent Declines: A Fundamental Perspective
IMF Sees Recent Yen Falls as Reflecting Fundamentals
By Leika Kihara
Fundamentals Driving Yen’s Decline
The recent decline in the value of the yen is primarily driven by fundamental factors, according to a senior official from the International Monetary Fund (IMF). Sanjaya Panth, the deputy director of the IMF’s Asia and Pacific Department, emphasized that the exchange rate of the yen is heavily influenced by interest rate differentials. As long as these differentials persist, the yen will continue to face downward pressure.
“On the yen, our sense is that the exchange rate is driven pretty much by fundamentals. As long as interest rate differentials remain, the yen will continue to face pressure,” Panth told reporters.
No Need for Intervention
Panth also stated that the current situation does not warrant any intervention by Japanese authorities in the currency market. The IMF believes that foreign exchange intervention is only justified under specific circumstances, such as severe market dysfunction, heightened financial stability risks, or a de-anchoring of inflation expectations. Panth highlighted that none of these considerations are present at the moment, indicating that authorities should refrain from intervening in the currency market.
“I don’t think any of the three considerations are existing right now,” Panth stated when asked about the recent declines in the yen.
Despite the yen’s depreciation, Japanese authorities are facing renewed pressure to address the sustained decline. Investors are betting on higher U.S. interest rates while the Bank of Japan maintains its super low interest rate policy. However, the IMF’s perspective suggests that the current circumstances do not warrant intervention.
BOJ’s Dovish Stance
The Bank of Japan (BOJ) has adopted a dovish stance compared to other central banks worldwide. Despite inflation remaining above its 2% target for over a year, the BOJ continues to keep interest rates ultra-low. BOJ Governor Kazuo Ueda has emphasized the need to maintain these rates until inflation is durably around 2% and supported by robust demand and sustained wage increases.
Upside Risks to Inflation Outlook
The IMF acknowledges that there are more upside risks than downside risks to Japan’s near-term inflation outlook. The economy is operating near full capacity, and price rises are increasingly driven by solid demand. However, Panth believes that it is not yet the time for the BOJ to raise short-term rates due to uncertainties regarding the impact of slowing global demand on Japan’s export-reliant economy.
Steps Towards Monetary Tightening
Panth suggests that the BOJ should continue taking steps to allow long-term interest rates to move more flexibly. This flexibility would lay the groundwork for eventual monetary tightening. He praises the BOJ’s previous efforts to increase flexibility on the long end of the yield curve and considers them as steps in the right direction.
“What it did in December and July to increase flexibility on the long end of the yield curve was very much steps in the right direction,” Panth stated.
Despite the pressures and debates surrounding the yen’s decline, the IMF’s assessment provides a fundamental perspective that emphasizes the importance of interest rate differentials in driving currency movements.