New face, same pain for the yen

For a while it seemed that the Japanese central bank would loosen the reins. But with the nomination of Masayoshi Amamiya as the new chairman, the bank has a stranglehold on interest rates. This will push the yen down again.

Just before the end of 2022, a landslide appeared to be brewing in the policy of the Bank of Japan (BoJ), which has had a stranglehold on interest rates for more than a decade. The key interest rate at which banks can store money has been just below zero for years. A big difference with other national banks, however, is that the BoJ also keeps long-term interest rates in a very narrow range. By buying and selling government bonds, the bank keeps the interest rate on ten-year government bonds at a level of 0%. If interest rates deviate by even a quarter of a percent, the BoJ intervenes by buying or selling loans.

Finally an inflation jump
By keeping interest rates very low, the central bank wants to boost economic growth and fuel inflation. The latter has now been successful. Japan's inflation rate of 4% is twice the official target of around 2%. However, as in much of the rest of the world, this was largely due to external factors, such as higher energy and food prices and a rising dollar. Despite the fact that inflation looks set to fall significantly again in the course of the year, the BoJ surprised by widening the interest rate range from a quarter to half a percent at the end of 2022.

Promising advance
The minor change was seen in the financial world as an advance on a somewhat looser monetary policy. As part of its current strategy, the bank has already bought more than half of Japan's total government debt. In the long term, of course, this is no longer sustainable. But this week it was announced that the BoJ will probably continue with this for a while. Masayoshi Amamiya has been nominated as the new BoJ chairman. However, Amamiya is the great architect of the policy with which current chairman Haruhiko Kuroda has been trying for years to stir up Japanese inflation.

Limits to own policy
So it must be very strange if the 67-year-old Amamiya implements the change of course that the financial markets seemed to be counting on. This also has major consequences for the currency world. The prospect of higher Japanese interest rates has sent the yen up nearly 18% against the US dollar since the last week of October. However, this advance has come to an end with the nomination of Amamiya. It is only a matter of time before there are almost no more government bonds to buy, so that the central bank comes up against the limits of its own policy. But until then, under a new BoJ chairman, the yen will continue to feel the old pain.

Joost Derks

Joost Derks is a currency specialist at iBanFirst. He has over twenty years of experience in the currency world. This column reflects his personal opinion and is not intended as professional (investment) advice.

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