Japanese Yen: Policy delay risks weakness against US Dollar - Commerzbank

Commerzbank’s Thu Lan Nguyen warns that Japan’s Bank of Japan (BoJ) faces mounting pressure as the Japanese Yen weakens and markets question the central bank’s commitment to tighter policy. The BoJ’s recent rate hike failed to meet expectations, and threats of foreign exchange intervention are considered inadequate. Nguyen argues that delayed, cautious tightening could further erode Yen stability and potentially hinder economic growth.

In the short term, this may deter some traders from selling the yen. However, in the long run, merely threatening intervention is unlikely to suffice. Ultimately, the BoJ must back up its words with concrete action. The issue lies in the BoJ’s ambiguous priorities. While it aims to prevent further yen depreciation, it would prefer a middle ground: additional rate hikes without derailing the economy.

Markets may not be willing to wait indefinitely, and if the BoJ appears unwilling to defend the currency robustly, its credibility could be compromised. Once investor confidence falters, even aggressive rate hikes may prove insufficient to halt the decline. The Bank of Japan’s dilemma is stark: strike a balance between currency stability and economic growth, or risk losing control of both.