The view is that the pace at which the Bank of Japan advances monetary tightening, rather than sporadic intervention, is crucial to a sustained yen recovery. Shortening intervals between BOJ rate hikes have been suggested, and the credibility of coordinated U.S.-Japan intervention has also been discussed.
The view is that the pace at which the Bank of Japan advances monetary tightening, rather than sporadic foreign-exchange intervention, is crucial to a sustained recovery in the yen.
The gradual shortening of intervals between BOJ rate hikes is considered a sign that the central bank's monetary policy reaction function is changing incrementally.
The backdrop had included the defeat of deflation, an aging population and sluggish nominal growth, but conditions have changed since the pandemic as inflation has become entrenched and wages have risen. The BOJ is proceeding with policy normalization at a cautious pace, although some believe that shortening the intervals between rate hikes alone would be insufficient to reverse the yen's decline.
In terms of yen movements, coordinated U.S.-Japan intervention is considered more credible than intervention by Japan alone. At the same time, if the BOJ signals an intention to accelerate rate hikes, it could narrow the U.S.-Japan interest-rate differential itself and alter the dynamics surrounding the yen.
The market is focused on whether the BOJ can respond nimbly to changes in economic and price conditions and convince the market that it could accelerate the pace of rate hikes. If this materializes, the view is that it could lead to a full-fledged recovery in the yen.