Expectations for additional Bank of Japan rate hikes and concerns over fiscal discipline have emerged as factors that could determine the sustainability of yen depreciation. The movements in the Japan-US interest-rate differential and the outlook for fiscal policy are examined.
The Bank of Japan's monetary policy meetings for the year are scheduled for September, October and December. A former vice minister of finance for international affairs believes additional rate hikes are highly likely in September and December, but notes that depending on debate over a consumption-tax cut at the extraordinary Diet session in the autumn, a December hike could become difficult and be postponed until January next year. The focus is on how this could affect the yen.
Although the Japan-US interest-rate differential is narrowing, there have been periods of a return to US dollar strength and yen weakness, supporting the trend observed after coordinated intervention by Japan and the United States. The yen's response to appreciation has been muted, and concerns over fiscal discipline have been cited as a factor behind the continued rise in long-term interest rates.
The prevailing view is that the rise in long-term interest rates is largely attributable to concerns over fiscal discipline stemming from the lack of clarity on funding for a consumption-tax cut under the Takaichi administration. Unless concerns over fiscal discipline are dispelled, the yen could continue to weaken despite the narrowing Japan-US interest-rate differential.
Regarding personnel changes among senior Ministry of Finance officials, the view is gaining ground that the government will exert its leadership in response to resistance from those committed to fiscal consolidation, and the possibility of a course correction to maintain fiscal discipline is being discussed.