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

Commerzbank’s Thu Lan Nguyen argues that the Bank of Japan (BoJ) faces renewed pressure as the Japanese Yen (JPY) weakens and markets question its commitment to tighter policy. The BoJ’s latest rate hike failed to satisfy either domestic officials or international partners, and mere threats of FX intervention are seen as insufficient. Nguyen warns that delayed, cautious tightening could ultimately undermine both Yen stability and economic growth.

BoJ risks credibility on Yen

"In the short term, this may discourage some market participants from selling the yen further. Over the longer run, however, merely threatening intervention is unlikely to be enough. Sooner or later, the BoJ will have to back up its words with action."

"The fundamental problem is the persistent uncertainty surrounding the BoJ's priorities. On the one hand, it clearly wants to prevent a further sharp depreciation of the yen. Achieving that would require a credible signal that additional and potentially faster rate hikes are on the table."

"In an ideal world, the BoJ would probably prefer a middle path: further rate hikes, but at a pace that does not derail the economy. The challenge is that markets may not be willing to wait indefinitely. If the BoJ creates the impression that it is unwilling to defend the yen decisively, it risks losing credibility."

"Once investors begin to lose confidence in a currency, a point can be reached where even aggressive rate hikes are no longer sufficient to reverse the trend. The most prominent example is Sweden's Riksbank, which temporarily raised its policy rate to 500% in the early 1990s in an attempt to defend the krona, only to abandon its exchange-rate peg shortly thereafter."

"In short, time is running out for the BoJ. The longer it tries to balance currency stability against economic growth, the greater the risk that it ultimately loses control of both."