The stubbornly weak yen and Japanese economic indicators are fuelling bets that the Bank of Japan is poised to resume raising interest rates.
As the Bank of Japan's last meeting of the year draws near, Stefan Angrick, head of Japan and frontier market economics at Moody's Analytics, spoke to The Wall Street Journal about the yen and its impact on policymaking. Edited excerpts follow:
Q: What's driving yen depreciation?
Angrick: There are lots of theories out there, but I don't really buy any of them. To my mind, it's very much speculative trading.
The idea that it has to do with monetary-policy differentials can't be true. The rate spread implies the yen should be somewhere around 120, it's not. It's unlikely to be anything fundamental about the economy, because Japan runs a massive current-account surplus.
There are ideas about capital outflows having changed--more money now moving abroad, etc. But that's been the case since the 1990s so that hasn't shifted in a structural sense. A lot of people say fiscal expansion damages confidence in the yen, but then we've had a big fiscal contraction over the last five years and the yen depreciated regardless.
Trading around the yen has become incredibly one-sided: The BOJ hikes, the yen depreciates. The BOJ holds, the yen depreciates. Fiscal policy tightens, the yen depreciates. Fiscal policy expands, the yen depreciates. It's just not reasonable. There's no economic logic behind this. When you look at proxies of carry trade activity, that speculative trading is still there.
Q: Does yen weakness lock in a rate hike?
Angrick: I think there are certain levels that make the BOJ and the government uncomfortable.
I don't know that this level is static; rather, it moves over time. If you go by what the interest-rate spread implies, the yen should be somewhere between 120 and 130 to the dollar. It's quite a bit weaker than that--enough for them to contemplate a rate hike.
I think they were always going to hike, the question was if in December or January. BOJ policymakers won't really be any smarter in January versus December, in terms of economic or wage growth data. If they're concerned about wage growth, that data will only come in February/March next year.
The yen being weak is, in some ways, enough for them. It sort of amplifies the kind of inflation they don't want. So that's one reason they might want to tighten. I've shifted my forecast to December, but if the yen changes significantly before the BOJ meets, that would alter the calculus.
The government is unlikely to stand in the way of a 25 bps rate hike in December-January, maybe even another further out. I think they would start to ask difficult questions once the policy rate goes past 1% but I wouldn't be surprised if the BOJ goes to 1% over the next six months. That is perfectly possible, even with the Takaichi government.
Q: What implications does yen weakness have for inflation?
Angrick: How much that feeds into domestic inflation is hard to say because in the past that correlation was very weak. Typically, the exchange rate wouldn't really affect prices in Japan much. The yen has depreciated much, much more over a shorter period of time now than it had at any point in the past. So you can't really extrapolate forward from old estimates.
But it is something that is on the BOJ and the government's minds. The BOJ doesn't like it because it keeps that supply-driven "bad" inflation sticky.
The government doesn't like it because it recognizes inflation is one big reason why the economy is weak, why consumer spending is so tepid. And they also don't like a weak yen because it amplifies social discontent--discontent over foreigners coming over pricing out locals. Or how it affects real-estate purchases.
And--maybe closer to home for Takaichi government--they really want to boost defense spending.
Japan has a lot of forex reserves, but when they buy defense equipment, that goes into the main budget, so all of that happens in yen terms. And when the yen depreciates, then they can't buy as much foreign defense equipment as they would like.
Write to Fabiana Negrin Ochoa at fabiana.negrinochoa@wsj.com
(END) Dow Jones Newswires
12-15-25 0230ET
