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The yen fell to a new 34-year low on Friday after the Bank of Japan kept interest rates near zero, even as pressure mounted on the central bank to tighten policies to support the currency.
Following the BoJ’s recent historic move to end its ultra-loose monetary policy, Governor Kazuo Ueda has had to grapple with the challenges posed by the depreciation of the yen and growing signals in the US that the Federal Reserve will keep interest rates high to meet the curb inflation.
On Friday, the BoJ unanimously agreed to keep its overnight interest rate in a range of around zero to 0.1 percent. In March, the central bank ended its negative interest rate policy, increasing borrowing costs for the first time since 2007.
“It is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan’s economic activity and prices,” the BoJ said in a statement.
The central bank forecasts that core inflation, which excludes volatile food prices, will remain above or near its 2 percent target over the next three years. It did not change its plan to continue buying Japanese government bonds.
The BoJ has long struggled to keep price increases at sustainable levels to protect the economy from deflation. While domestic consumption remains weak, the falling yen is expected to fuel inflation in the coming months by increasing the cost of imported goods.
Analysts expect the BoJ will not raise interest rates until July at the earliest, when the bank confirms a rise in services inflation and real wages, which would help boost consumption.
“Markets remain on high alert, waiting for signs as to whether the yen’s current weakness will be interpreted as a persistent inflation signal and invite further hawkish rhetoric from the central bank,” said Naomi Fink, global strategist at Nikko Asset Management. “However, the BoJ is likely to find the impact of yen weakness on inflation more concerning than short-term currency movements.”
The yen remained steady at around ¥155.55 per dollar in morning trading, but weakened sharply to ¥156.12 within 10 minutes of the BoJ’s announcement that it would leave policy unchanged. Traders had renewed bets that the interest rate differential between the US and Japan would continue to put downward pressure on the Japanese currency.
The Nikkei 225 index briefly rose more than 1 percent after the announcement.
Although many market participants see a rising risk of direct intervention by Japanese authorities to support the yen, analysts said the currency’s fall on Friday made sense as the BoJ refrained from any hawkish surprise.
“Ueda will have a lot of work to do at the press conference [on Friday afternoon] to prevent the yen from falling further,” said Benjamin Shatil, senior Japan economist at JPMorgan.