Trump win raises risks for BOJ as yen resumes decline

TOKYO: A dollar rally fueled by Republican Donald Trump’s victory in the US presidential election could increase pressure on the Bank of Japan to raise interest rates as early as December to prevent the yen from falling back to three-decade lows.

Trump’s victory in the US presidential election sent the dollar soaring as expectations of lower taxes and import tariffs fueled optimism about economic growth and fueled concerns about inflation.

A stronger dollar briefly pushed the yen to a three-month low of 154.71 on Thursday, well below the high of 140.62 reached in mid-September.

While the weak yen provides a boost to exports, it has become a headache for Japanese policymakers, increasing import costs for fuel and food and in turn hurting consumption.

Rising inflation was widely seen as a factor behind the widespread voter turn against the ruling coalition in last month’s general election.

Japan’s top currency diplomat Atsushi Mimura strengthened his warning against the yen’s sharp fall on Thursday, saying authorities were prepared to act against “excessive” movements in the currency.

One nightmare scenario for policymakers would be for the yen to resume falling to its three-decade low of around 162 per dollar hit in July, a move that prompted the Bank of Japan to raise interest rates to 0.25 percent on July 31.

The yen’s fall then led to calls from ruling party lawmakers for the Bank of Japan to raise rates or send clearer signals of its intention to raise borrowing costs.

Prime Minister Shigeru Ishiba stunned markets on Oct. 2 by saying the economy was not ready for further rate hikes, although he later softened his statement, saying he would not interfere with Bank of Japan policy.

“Policymakers don’t want a weak yen, so even those who have urged the Bank of Japan to be cautious about raising rates might agree to hike rates if the yen’s fall accelerates,” said Tsuyoshi Ueno, senior economist at NLI Research Institute. “In this sense, a weak yen could push the Bank of Japan into a sustained rate hike.”

HAND IN HAND

The Bank of Japan pulled out of a decade of sweeping stimulus in March and raised short-term interest rates to 0.25 percent in July as Japan made progress toward sustainably meeting its 2 percent inflation target.

While many analysts expect the Bank of Japan to raise rates again by March, opinions are divided on whether it will act in December – or wait until January or March to assess more data.

The Bank of Japan kept interest rates steady last month but removed language about focusing on external risks, leaving open the possibility of higher rates in the short term.

A renewed fall in the yen could raise the likelihood of BOJ action in December, given the BOJ’s sensitivity to currency weakness that is driving up import costs, analysts said.

“The Bank of Japan hasn’t made it clear, but its rate hike in July was likely driven in part by its concerns about the yen falling too far,” said Shinichiro Kobayashi, chief economist at Mitsubishi UFJ Research and Consulting.

“If the yen gets closer to 160 per dollar again, the likelihood of a rate hike by the end of the year will increase,” he said.

Tomoyuki Ota, chief economist at Mizuho Research & Technologies, also sees 160 to the dollar as the authorities’ line in the sand, which raises the possibility of a rate hike by the Bank of Japan and government foreign exchange intervention to support the yen.

In the previous battle with the yen’s fall, the government and the Bank of Japan appeared to be working hand in hand.

In July, Japanese authorities spent 5.53 trillion yen ($35.8 billion) on foreign exchange market interventions to lift the yen from a 38-year low of about 162 to the dollar. That same month, the Bank of Japan raised rates and emphasized its determination to continue raising borrowing costs.

Bank of Japan Governor Kazuo Ueda’s hawkish hints at a short-term rate hike at a policy meeting last month pushed the dollar to 150 yen.

“There is no doubt that the market is moving towards a weaker yen. If the yen’s fall accelerates, the likelihood of a rate hike in December will increase,” said Ota of Mizuho Research. “The government and the Bank of Japan are likely to act quickly, including through foreign exchange interventions.”

($1 = 154.4400 yen)