3 reasons why the Bank of Japan won’t intervene to stop the yen’s decline

The Japanese yen is melting as it reached a new 24-year low against the US dollar. It traded yesterday as low as 136.70, a level not seen since 1998.

Besides the meltdown, one should notice the speed of the yen losing its value. Since March this year, it has lost more than 15% against the US dollar and other peer currencies.

Are you looking for fast-news, hot-tips and market analysis?

Sign-up for the Invezz newsletter, today.

It is not the first time that the yen has moved so aggressively. Back when it traded below 80 against the US dollar, a mix of innovative policies sent the yen down.

The Bank of Japan (BOJ) is one of the central banks that eased the monetary policy most because the country has been stuck in a low growth and low inflation environment for many years. As such, to bring inflation close to the central bank’s target of 2%, the BOJ engaged in quantitative easing, qualitative easing, and yield curve control (YCC) programs.

BOJ struggled for years to create higher inflation

Inflation, or its lack, has been a true problem for the Bank of Japan in the past decades. All central banks in advanced economies have a mandate of price stability as defined by a 2% level of inflation.

It is considered that 2% is far enough from the zero level so that a central bank has room to maneuver the interest rates should the economy need stimulus. But the BOJ had a hard time bringing inflation into positive territory, not to mention to the 2% target, despite doing more than any other central bank in terms of its easing monetary policies.

But now inflation has started rising. The PPI or Producers Price Index leads, and the CPI or Consumer Price Index should follow.

Still, there is a gap between the two, and the BOJ would likely want to see higher CPI before doing something to alter its policy.

Wage inflation pressures remain low in Japan

Wage inflation is not seen in Japan. Wages are a key component in rising inflation, and while some signs suggest that wage inflation might be taking hold in Japan, for the moment, it is not a worry for the Bank of Japan.

YCC policy forces the BOJ to ease while other central banks tighten

Perhaps the most important factor in the recent yen’s depreciation is the YCC program. Global yields are on the rise, and Japan is not immune.

But the Bank of Japan keeps buying bonds to cap the yields from rising. The more other central banks raise rates, the more global yields rise, and the more the Bank of Japan will ease.

Until the vicious circle ends, the pressure on the Japanese yen should continue to mount. Therefore, traders should expect further gains in the USD/JPY and other JPY pairs.