When the Bank of Japan lifted its negative interest rate policy on March 19, it emphasized that policy rates would rise slowly in the future to avoid causing turmoil in financial markets with the first rate hike in 17 years. However, this move had an unexpected side effect: a rapid depreciation of the yen.

The current strengthening of the dollar against the yen is more characterized by a strong dollar than a weak yen. It is more like a surge in the dollar. Nevertheless, despite the Bank of Japan's lifting of the negative interest rate policy, the yen did not appreciate at all, mainly because the Bank of Japan emphasized the prolonged easing of monetary policy.

However, the tone of Governor Kuroda's remarks has changed abruptly recently.

On April 18, Governor Kuroda stated at a press conference after the conclusion of the G20 Finance Ministers and Central Bank Governors Meeting that if the yen continues to depreciate and has a significant impact on the overall price level, "there could be a change in monetary policy." This is a rather bold statement.

Furthermore, in a speech in Washington on the 19th, he stated that if the overall price level continues to rise, "there is a very high possibility of raising interest rates."

The impression is that the tone of the "dovish" remarks at the time of the lifting of the negative interest rate policy has quickly changed to "hawkish" in less than a month. Naturally, such a change has been triggered by the rapid depreciation of the yen.

Former Governor Kuroda was seen as having a strong tolerance for a weaker yen, but Governor Ueda is more focused on the negative aspects of a weaker yen on the economy and prices. He is showing a strong stance of working with the government to prevent further depreciation of the yen.

The current "hawkish" remarks by Governor Ueda are likely to be seen as "verbal intervention" to prevent further depreciation of the yen. Therefore, just because such remarks have been made does not mean that the Bank of Japan will immediately implement additional rate hikes. There is a high possibility that additional rate hikes will be postponed at the next monetary policy meeting on April 25-26.

However, the "verbal intervention" by the Bank of Japan's "hawkish" remarks to prevent further depreciation of the yen is also having an unexpected side effect: a decline in stock prices. The Nikkei Stock Average temporarily fell sharply by 1,300 yen on the 19th, resulting in a significant adjustment of over 10% in the past month.

During this time, the yen has depreciated in the foreign exchange market. In the past, a weaker yen was a factor supporting higher stock prices. The current divergence between the two is likely due to the increasing speculation of additional rate hikes caused by the "verbal intervention" by the Bank of Japan's "hawkish" remarks amid yen depreciation, leading to a correction in stock prices.

If stock prices were to plummet, it would have a negative impact on the economy. Moreover, there is a risk that dissatisfaction with the government and the Bank of Japan could increase, particularly from individuals who have started investing through the new NISA program. This puts the Bank of Japan in a difficult position, caught between yen depreciation and falling stock prices.

To mitigate the risk of prompting a stock price adjustment, Governor Ueda may make slight adjustments to soften the "hawkish" tone, possibly during the press conference after the monetary policy meeting on April 26. Following the announcement in the outlook report, which is expected to significantly revise upward the inflation outlook for fiscal year 2024, there is a high likelihood that expectations for additional rate hikes will increase.

However, in addition to the possibility of the expected additional rate hikes being postponed, if Governor Ueda indeed softens the tone towards additional rate hikes, it could potentially lead to further yen depreciation.

In September 2022, the government intervened in the foreign exchange market by selling yen and buying dollars, which coincided with a Bank of Japan monetary policy meeting day. This was due to the perception that Governor Kuroda's remarks during the press conference were seen as "tolerating yen depreciation," in addition to the policy adjustment towards tightening being postponed at the meeting. A similar scenario could unfold this time as well.

However, what's different from the previous intervention is the strong coordination between the government and the Bank of Japan to prevent yen depreciation, and the fact that the Bank of Japan now has a strong tool, rate hikes, to combat yen depreciation following the lifting of the negative interest rate policy in March. Considering this, it might be expected that after buying time through intervention, the government could manage to somehow halt the yen's slide around 160 yen per dollar.

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  Takahide Kiuchi

  Executive Economist