Central Bank Drag, Yen in Danger?

Due to the lack of details on reducing bond purchases at the interest rate decision meeting this Friday, which was below market expectations, the Japanese yen continued to decline.

On Friday, the Bank of Japan held a meeting. It was decided to keep the interest rate unchanged, which was in line with market expectations. The surprise came in the form of bond purchases, with the Bank of Japan being "vague" about changes in bond purchases, indicating that the announcement of a reduction in bond purchases and decisions on future government bond purchases will be made at the July meeting.

Prior to the interest rate decision, a survey by the media showed that more than half of the respondents (economists) originally expected the Bank of Japan to start reducing bond purchases in June. Therefore, many analysts and investors believe that the central bank's statement on Friday actually delayed the normalization of monetary policy, which is crucial for the recovery of the yen exchange rate.

Bank of Japan Governor Haruhiko Kuroda has repeatedly stated his determination to gradually normalize monetary policy after more than a decade of large-scale stimulus measures. However, his decision to delay the announcement of a bond reduction plan indicates that Bank of Japan officials remain cautious. The continued weakness of the yen has also made policymakers uneasy, as the yen exchange rate experienced a significant decline after the April central bank meeting, ultimately leading to Japan's largest-ever foreign exchange intervention.

Although economists and analysts generally believe that the plan to announce a bond reduction plan in July will make it more difficult for the Bank of Japan to raise interest rates on the same day, some Bank of Japan observers believe that there are further signs that an interest rate hike in July is still under consideration.

Regarding the possibility of a rate hike next month, Kuroda also gave a positive response at a subsequent press conference: "We will propose a specific plan for long-term Japanese government bond purchases in July. Adjusting the degree of monetary easing and raising short-term interest rates is possible based on economic and price information at that time."

Kuroda also stated that the board needs more time to carefully consider the scale of the reduction. He hinted that the reduction would be significant and not a minor adjustment.

Atsushi Takeda, Chief Economist at Itochu Economic Research Institute, said:

Their (Japanese officials) concerns about the economy outweigh concerns about yen depreciation.

Kuroda explicitly stated that he would not directly address foreign exchange rates through actions.

The yen-dollar exchange rate fell to its lowest level since April earlier on Friday, then slightly rebounded after Kuroda's press conference. As of the time of writing, 1 US dollar is equivalent to 157.32 Japanese yen.