Bank of Japan Governor Haruhiko Kuroda said interest rate increases by the Federal Reserve won’t necessarily cause the yen to weaken, saying various factors affect the currency market.
In a sequence of remarks on Thursday that appeared to trigger a strengthening of the yen, Kuroda also said the BOJ would handle any eventual exit path well, though it wouldn’t be easy.
Fed rate hikes “may affect the value of US government bonds and stock prices,” Kuroda said in response to questions in parliament. “So I think it’s not necessarily the case that Japan’s capital will flow into the US continuously, causing the yen to weaken.”
The governor also said there was no single decisive factor that determines foreign exchange rates. The yen quickly strengthened to 126.66 against the dollar from an earlier level of 127.18 on Thursday.
The market reaction to comments that were essentially a repetition of his views, suggests nervousness among investors after Japan’s inflation reached the BOJ’s target level of 2%, especially following hawkish turns by other major central banks.
With inflation rates at 2%, Kuroda’s remarks are under intense scrutiny by the market. Kuroda previously caused a weakening of the yen with his remarks but the comments of Thursday didn’t follow the same direction. That’s probably why the yen gained.
Japan’s key inflation gauge rose 2.1% in April, according to a government report last week. The BOJ chief showed no sign of celebration, though. Instead he repeated his view that the current cost-push inflation isn’t sustainable, and monetary easing needs to continue.
With the market increasingly seeing US Treasury yields as having peaked out for now, investors may be testing to see where the yen will settle, according to Kumano.
Analysts are increasingly thinking the Japanese currency won’t move as much as previously expected and that the 140 yen mark to the dollar level won’t happen as once feared.