Has the Japanese Yen fallen below the floor? Is the Bank of Japan about to act early?

The Japanese Yen has fallen to 158.55 against the US dollar, approaching multi-decade lows. The market is beginning to bet that the Bank of Japan may be forced to change its established rate hike pace as a result.

Sources familiar with the matter reveal that central bank officials are increasingly concerned about the pass-through effects of yen weakness on domestic inflation. As companies pass rising import costs onto consumers, price pressures could intensify, potentially disrupting policymakers' original policy trajectory.

Although the market generally expects the next rate hike to occur in summer this year, officials tend to prefer acting more promptly rather than being overly cautious. This means that if the yen continues to weaken, the scheduled rate hikes every six months could face uncertainty, and action may be brought forward.

The policy meeting on the 23rd of this month is expected to keep interest rates at the 0.75% thirty-year high. However, the committee will continue to monitor until the last minute, focusing on assessing how exchange rate fluctuations might alter inflation expectations among households and businesses.

Yen depreciation typically increases inflationary pressures by raising import costs while boosting exports. However, some officials point out that as the yen remains weak, its negative impact on the economy may be increasing. The key is to seize the right timing for policy adjustments.

Yoshinobu Tsutsui, President of the Japan Business Federation, made a rare statement this week, calling on the government to intervene to prevent the yen from “overdoing” its depreciation. This reflects growing anxiety within the business community over exchange rate issues.

Although the Bank of Japan raised its benchmark interest rate last month, the yen against the dollar remains weak. Influenced by domestic political factors, the yen further declined to an 18-month low this week. Data from Bloomberg shows that over the past two years, the yen has fluctuated broadly between 140 and 161.95.

While the monetary authorities have strengthened verbal warnings, causing the yen to rebound slightly from its lows, the overall downward trend continues to exert pressure on the central bank's decision-making. The game between exchange rates and inflation is pushing the Bank of Japan into a more complex crossroads.

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