By Max Sato
(MaceNews) – Bank of Japan Governor Haruhiko Kuroda said Thursday that the recent depreciation of the yen has been limited in scope, and thus it is still good for Japan’s gradual economic recovery as its benefit of supporting exporter profits outweighs the cost of surging import prices.
He also downplayed the risk of the above-target inflation rampant in other major economies spreading to Japan, where sharp gains in producer prices have not filtered into consumer prices. The BOJ expects Japan’s inflation rate to rise from just above zero now to 1% in the next few years, only halfway to its 2% target.
“I’m not saying the weak yen is always good and the strong yen is always bad,” Kuroda told a news conference after the bank’s board decided in an 8-to-1 vote to maintain its current monetary easing stance at a two-day meeting.
Japanese firms have shifted production capacity overseas to better serve local needs in target markets, which has reduced the effect of a weak yen boosting export volumes with higher price competitiveness, the governor said, while noting that a yen fall pushes up import costs for households and firms dependent on domestic demand.
“The slight depreciation of the yen at this point is definitely a plus for the economy as (its benefit is) outweighing the impact of higher import costs,” Kuroda said, adding that the current pace and level of the dollar/yen exchange rate “is not a bad depreciation of the yen.”
The weak yen’s benefit of supporting Japanese firms’ repatriated revenues from other parts of the world has increased as they operate globally, he explained.
The dollar rose to a nearly three-year high above Y114 in recent trade before slipping back to around Y113.40.
The current level is not in a danger zone for Japan’s fragile economic recovery. Judging from past remarks by Japanese policymakers, they appear to be comfortable if the dollar/yen exchange rate remains stable in a range from around Y105 to about Y115, or in a wider Y100 to Y120 range.
Kuroda declined to discuss the specific level of the real effective exchange rate, the weighted average of a country’s currency in relation to an index or basket of other major currencies. He said the indicator may be useful from a historical viewpoint but not as a tool for the conduct of monetary policymaking, which should be forward-looking and also deal with the nominal exchange rate that households and businesses use on a daily basis.
The governor was asked whether the yen’s value may be too low when measured by the real effective change rate, which is a moving target as it changes in line with the weights of trade balances and inflation adjustment.
Kuroda is right about the nature of the measure, but he quoted the indicator in his market rhetoric in the past when it was convenient for him.
Kuroda said in his parliamentary testimony on June 10, 2015 that the yen was “unlikely” to continue depreciating from the existing level, triggering the dollar to slip below Y123 after its recent climb above Y125.
Asked about the dollar’s rise to a 13-year high of Y125.86 at the time, Kuroda replied, “The real effective exchange rate is unlikely to swing toward a further yen depreciation under the normal circumstances.”
His remarks reflected the concern shared among Japanese policymakers at the time that a sharp fall in the yen’s value would push up import costs further and hurt households and small businesses at a time when consumption had been slow to recover from a protracted slump caused by the April 2014 sales tax hike.
Currently, Japan’s economy is gradually recovering from the depth of its 2020 slump triggered by the pandemic.
In its latest quarterly Outlook Report released Thursday, the BOJ maintained its cautiously optimistic view on Japan’s economic recovery as Covid-19 vaccination makes progress and firms are trying to overcome supply constraints.
The BOJ continues to see solid medium-term outlook for Japan’s resilient GDP, repeating its July statement that risks to economic growth are “skewed to the downside for the time being, mainly due to the impact of COVID-19, but are generally balanced for the middle of the projection period onward.”
On the price front, the bank also maintained its assessment that risks to CPI “are skewed to the downside.”