A senior International Monetary Fund (IMF) official said Thursday (June 9) that the yen’s recent sharp depreciation was due to fundamental factors such as market expectations about divergent monetary policy paths between Japan and the United States.
Ranil Salgado, head of the IMF’s Japan mission, said the yen’s recent performance against the dollar is strongly correlated with the interest rate spread between Japan and the United States.
“We believe that the yen’s movements reflect fundamentals. We see both positive and negative effects in yen depreciation. Inflation in the medium-term will remain well below the BOJ’s target once the cost-push factors go away. We consider it appropriate for the BOJ to maintain monetary easing until inflation is achieved in a stable and durable manner,”Salgado said.
The yen fell to a 20-year low of 134.56 per dollar on Thursday. It was pressured by higher interest rates elsewhere at a time when the BOJ continues to discuss highly stimulative policies.
In Japan, inflation risks exist due to further increases in raw material prices and the increasing impact of yen depreciation on import prices.
With the inflation index, which eliminates the impact of food and energy costs, still below the BOJ’s targets, central banks must support the economy with ultra-loose measures.
Key consumer prices in Japan were 2.1% higher in April than a year earlier. This was the first time in seven years that the BOJ’s inflation target of 2% was exceeded, due to rising fuel and food costs.
BOJ officials have repeatedly stressed that such cost pressures justify temporary inflation and will not prompt the central bank to tighten monetary policy.