[Foreign Exchange Market] Unless the Japanese government abandons its 2% inflation target, the yen is unlikely to return to an appreciating trend (週刊 金融財政事情)

Weekly Financial Affairs pointed out that, in light of debate in the US over reviewing reflationary policy following the Japan-US summit and Japan's response, the BOJ should make careful decisions on its future rate-hike policy based on its estimate of the neutral interest rate. The main opinions at the BOJ's September meeting reportedly included calls to take the neutral interest rate into account. The market interpreted this as consistent with remarks by Minister of State for Economic and Fiscal Policy Kiuchi, prompting interest in how the BOJ would decide whether to raise rates again.

Second, the view was expressed that the reflationary policy originating in the 2012 pledge has not ended as long as the 2% price stability target remains in place. The analysis attributes this to inflation expectations and yen weakness as economic stimulus measures have been prolonged. A chart is also cited showing that indicators of tightening in bank lending have not declined and that the situation is taking on the appearance of a bubble.

Long-term interest rates continue to rise in both Japan and the United States, potentially affecting the supply and demand of funds for AI-related investment. The FOMC minutes noted concerns that market volatility could affect the financial system, and included discussion that banks should prepare for an increase in nonperforming loans. The assumed USD/JPY range calls for the yen to weaken to around ¥173 by year-end, while the view was expressed that a realistic downside level is approximately ¥153.

This article analyzes Japan's policy direction and the market's response, focusing on comments from Meiji Yasuda Asset Management, and concludes that the continuation of reflationary policy and the BOJ's policy decisions will affect the foreign exchange market going forward.