BoJ rate hike helps Japan breathe easy ahead of G7
Japan is breathing easy going into a G7 meeting this week despite the yen’s latest declines, as a Bank of Japan rate rise in February has left Europe with less reason to pin the blame on Tokyo’s economic policies.
By Agencies |
TOKYO: Japan is breathing easy going into a G7 meeting this week despite the yen’s latest declines, as a Bank of Japan rate rise in February has left Europe with less reason to pin the blame on Tokyo’s economic policies.
Before the previous meeting in February, some European officials had complained about yen weakness, saying it could give Japanese exports an advantage over European products. But despite the yen’s renewed decline to a record low against the euro this week, there have been few outward signs of such ire ahead of the meeting of Group of Seven finance ministers and central bankers in Washington on Friday.
“Monetary policy was the only variable that could be criticised, as there had been no currency market intervention,” said Eiji Hirano, a former BOJ assistant governor who until last June attended deputies’ meetings to prepare the G7 agenda. “Japan’s monetary policy was in question behind the scenes.”
About 10 days after the last G7 meeting in Essen, Germany, Japan’s central bank raised its key interest rate to 0.5%. “That makes Japan’s explanation of its policy more persuasive this time,” Hirano said. Japanese finance ministry officials, from finance minister Koji Omi down, have been trying to avoid a repeat of market excitement seen in February that the G7 would target the yen.
For them, it is hard to take the blame for the yen’s fall in a freely traded market, especially after Tokyo stopped its massive yen-selling intervention in March 2004 and has stayed out of the market ever since, the longest Tokyo has gone without intervening.
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“The situation is different from February, when the issue (of yen weakness) was highlighted along with Japanese monetary policy,” a Japanese finance ministry official said Tuesday. “Those who are interested may speak on the issue and that’s natural, but I don’t think it will be a loud voice.” A German finance ministry official chimed in and said Tuesday he expects no big surprises on currency talks at the G7. The G7 in February warned investors against risky one-way bets such as carry trades, in which investors use low-yielding currencies like the yen as a cheap source of funds to buy higher-yielding currencies.
Global stock markets fell sharply in February end, helping to trigger some unwinding of yen carry trades and giving investors an additional reminder of the danger involved in excessive risk-taking. The yen carry trade, whose volume grows when market volatility is limited, has been blamed for the yen’s falls.
In a way, the fact that investors seem to be more aware of risks involved in yen carry trades could make it harder for Europeans to complain about the yen’s renewed declines. Omi, who called himself an amateur on currencies when he became the finance minister last September, seems to feel more comfortable going into the G7 talks for his second time.
“I know their faces now and am getting more familiar with their thinking,” Omi said. Asked how the situation is different now from February when Europeans voiced concerns about the yen, Omi said, “As a whole, things seem to be peaceful and calm. We should hold frank discussions, especially when the situation is like this.”
Still, financial diplomacy aside, the yen remains less attractive to investors given wide interest rate differentials. The BOJ now guides the key overnight call rate to 0.5%, the highest in a decade, but that’s still below 5.25% in the US and 3.75% in the euro zone. And the gap is unlikely to go away any time soon.
BOJ governor Toshihiko Fukui will likely explain the BOJ’s stance to the G7 that the central bank will keep raising rates only gradually given almost zero inflationary pressure in the economy. The euro hit a lifetime high of 160.16 yen on Tuesday, while the dollar was near 119.20 yen at 0525 GMT.
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