Concerns over yen depreciation are intensifying, with the BOJ's March interest rate hike becoming the focal point—Former BOJ Governor Sakurai's perspective

Market concerns over interest rates and exchange rates continue, and the Bank of Japan’s monetary policy decision is approaching a critical juncture. Former BOJ member Makoto Sakurai points out that the most fundamental way to counter further yen depreciation is through interest rate hikes, and he suggests that the timing around the Japan-U.S. summit in March could be a strong candidate for a policy shift.

Limitations of Currency Intervention and the Need for Rate Hikes

Currently, amid concerns about a weaker yen, the government is attempting to curb sharp exchange rate fluctuations through currency intervention. However, Sakurai emphasizes that the effects of such intervention are only temporary. Given the persistent yen-selling pressure from market participants, intervention alone has its limits, and a more sustainable, structural solution requires raising interest rates. Higher rates would increase relative yields, encouraging foreign investors to buy yen.

Yen Depreciation and Inflationary Pressures

A significant decline in the yen raises import costs, which can lead to inflationary pressures spreading through the domestic economy. Meanwhile, the government’s fuel subsidy program helps mitigate some of these inflationary effects. Sakurai’s analysis indicates that rising import costs due to yen depreciation and downward pressure from subsidies are acting simultaneously, creating a complex overall inflation outlook. Financial authorities need to carefully assess this balance.

Spring Wage Negotiations and Policy Timing

This spring’s labor-management negotiations are expected to result in strong wage increases. Sakurai suggests that the BOJ could use this wage growth as a legitimate basis for raising interest rates. Higher wages could boost inflation expectations, which, combined with actual inflationary pressures, would strengthen the case for monetary tightening. The timing around the March summit is considered ideal for policy decisions based on these economic indicators. Given current concerns about yen depreciation, these decisions could be a crucial turning point for market stability.