Japan’s currency could face mounting downward pressure if financial markets perceive the country’s central bank as moving too cautiously against inflation threats, according to Asian Development Bank President Masato Kanda.
Speaking to reporters on Friday during his Washington visit, Kanda explained that while investors typically flock to the dollar during global uncertainty partly because America exports oil, the yen struggles to recover even when those positions reverse.
“The biggest reason is interest rate differentials (between the U.S. and Japan). With markets particularly focusing on what the U.S. Federal Reserve could do, Japan’s currency will be left behind if many people think the BOJ will be behind the curve” in addressing inflationary risks, he said.
The former top Japanese currency official noted that investor concerns about Japan’s fiscal health could also trigger yen selling. Kanda made these remarks while attending International Monetary Fund and World Bank Group meetings this week.
Prime Minister Sanae Takaichi, who supports increased government spending, has implemented fuel price subsidies and promised continued economic stimulus measures.
However, these policies face criticism for potentially worsening Japan’s massive government debt, which already equals twice the nation’s economic output – the highest debt-to-GDP ratio among developed nations.
Though Japan isn’t alone in subsidizing fuel costs, Kanda emphasized such programs should remain focused and limited to prevent market distortions.
“Price fluctuations are instruments that help society adapt to new norms. In general, it’s inappropriate to switch them off and hamper changes in public behavior,” he said.
Rather than broad subsidies, Kanda recommended nations invest in energy efficiency improvements, expand oil stockpiles, and diversify their energy sources.
The dollar fell to seven-week lows Friday after Iran announced the Strait of Hormuz remained open, suggesting potential Middle East conflict resolution.
While the dollar also declined against the yen, Japan’s currency stayed close to the 160-per-dollar level that previously triggered government intervention. Friday’s rate stood around 158.61 yen per dollar.
Japan’s central bank has maintained low rates despite nearly four years of inflation near its target, concerned about damaging the fragile economy even as import costs from the weak yen and wage increases fuel price pressures.
Kanda, who served as Japan’s chief currency official until July 2024, earned the nickname “Mr. Yen” for his record-setting foreign exchange interventions to combat the currency’s steep decline.
