With the world facing uncertainty over the new administration in Washington, the Japanese central bank is among the many keeping their eyes peeled.
The yen’s depreciation against the dollar since Donald Trump won the U.S. presidential election in November has given the Bank of Japan some much-needed breathing room, as a weaker home currency will likely buoy the economy and consumer prices here.
BOJ Gov. Haruhiko Kuroda welcomed the prospect of the yen softening on the back of a robust American economy, saying Trump’s planned tax cuts and infrastructure spending would lift the economies of the U.S. and the world.
The BOJ could watch from the sidelines without having to roll out more monetary easing — a particularly helpful development for a central bank nearly out of easing options.
“The specifics of economic policy under the Trump administration have not become clear,” according to BOJ Deputy Gov. Hiroshi Nakaso. But the bank apparently expects lower taxes and other anticipated economic measures to boost the economy.
A Trump-led U.S. leaning toward protectionism, of course, poses major risks. But the bank seems to be betting that even he would not implement policies so radical that they could break supply chains spanning the entire world.
The Federal Reserve is also looking to raise interest rates again, with Chair Janet Yellen highlighting the prospect of mild economic growth continuing for a few months. American rate hikes could weaken the yen further. Then the BOJ might not only skip additional easing, but also consider raising the target for Japanese long-term rates from the current level of around zero.
But just how long the strong-dollar climate will persist is unclear.
Key U.S. leaders have sent mixed messages. Trump said earlier this week that the dollar is too strong and is “killing us.” His Treasury secretary nominee, Steven Mnuchin, told a hearing just two days later that the dollar’s long-term strength is “important.”
Trump could warn against a strong dollar again. If the greenback’s strength ends up putting the brakes on the American economy, or if the flight of funds from emerging markets accelerates, the global economy would come under clouds. The safe-haven yen could then appreciate sharply.
“The BOJ’s next policy moves will depend on foreign exchange rates,” said Yasunari Ueno of Mizuho Securities. A strong yen is the last thing the central bank wants to see.