TOKYO (AFP) – The yen fell against the dollar on Thursday as the Bank of Japan left borrowing costs unchanged, extending a retreat for the currency after the Federal Reserve forecast fewer rate cuts.
Analysts said policymakers were waiting for a clearer picture to emerge of next year’s wage increases before announcing another interest rate hike, which risks cooling the economy.
Political factors were also at play after the government passed an extra budget worth nearly JPY14 trillion (USD90 billion) to help pay for a massive economic stimulus package.
The BoJ said after a two-day policy meeting that it would hold rates at around 0.25 per cent — pushing the yen to more than 155 per dollar, compared with 153.66 on Wednesday.
“Japan’s economy has recovered moderately” and “is likely to keep growing”, the bank said in its policy statement, but it also pointed to risks ahead.
These included “developments in overseas economic activity and prices, developments in commodity prices, and domestic firms’ wage- and price-setting behaviour”.
The yen has cratered in value from its early 2022 levels of around 115 per dollar, before Russia’s invasion of Ukraine.
That is due in part to a mismatch between the Bank of Japan’s low interest rates to support the economy and months of monetary tightening from other central banks including the Fed.
The US central bank on Wednesday cut rates by a quarter point — its third straight reduction — but signalled a slower pace of policy easing ahead owing to sticky inflation and uncertainty surrounding President-elect Donald Trump’s economic plans.
The government’s latest stimulus package includes handouts for low-income households, fuel and energy subsidies and assistance for small businesses.
Prime Minister Shigeru Ishiba is hoping the funds will lift the economy but also boost his popularity after the ruling coalition’s worst election result in 15 years.
Tsuyoshi Ueno, senior economist at NLI Research Institute, told AFP ahead of Thursday’s decision that the BoJ thinks “the picture of next year’s wage increases will be clearer in January”.
“As the minority government is discussing budget and tax reforms involving the opposition… it would be bad timing for the BoJ to hike its rate” as it could drag on the economy, he said.
A key BoJ survey published last week showed that optimism among Japan’s largest manufacturers rose only slightly, with analysts warning the figures point to sluggish growth ahead.
Japan’s gross domestic product slowed between July and September, partly because of a fierce typhoon and warnings to be prepared for a major earthquake, which did not happen.
Shotaro Kugo, senior economist at Daiwa Institute of Research, said the group was expecting a January rate hike by the BoJ.
“A rate hike right after the government’s economic stimulus package would be going in the opposite direction to the government’s move,” he told AFP.
Also, “if you consider the risks connected to… Trump, it would be better for the BoJ to wait until January or even March, to have more information about Trump’s policies”.
