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IMF says yen’s recent ‘significant’ fall reflects fundamentals

The yen’s recent “significant” depreciation reflects fundamentals, such as market expectations of differing monetary policy paths between Japan and the United States, a senior International Monetary Fund (IMF) official said on Thursday (Jun 9).

Ranil Salgado, the IMF’s Japan mission chief, said the yen’s recent moves against the dollar had been strongly correlated with Japan-US interest-rate differentials.

Rising global raw material prices had also weighed on the yen, because Japan, a major commodity importer, must pay more dollars, he said.

“We believe that the yen’s movements reflect fundamentals,” Salgado told an online seminar. “We see both positive and negative effects in yen depreciation.”

A weak yen would help exporters and facilitate achievement of a 2 per cent inflation target by the Bank of Japan (BOJ) by pushing up import prices, Salgado said.

But the yen’s depreciation would hurt importers and households by pushing up the cost of living, he added.

The yen dropped to a fresh 20-year low of 134.56 per dollar on Thursday, weighed down by rising interest rates elsewhere at a time when the BOJ remains wedded to keeping policy highly stimulatory.

Salgado said Japan was facing some upside risks to inflation, due to sustained increases in commodity prices and the upward effect on import prices caused by the yen’s fall.

But with an index of inflation stripping away the effect of food and energy costs still below the BOJ’s target, the central bank must support the economy with ultra-easy policy, he said.

“Inflation in the medium-term will remain well below the BOJ’s target once the cost-push factors go away,” Salgado said.

“We consider it appropriate for the BOJ to maintain monetary easing until inflation is achieved in a stable and durable manner.”

Japan’s core consumer prices in April were 2.1 per cent higher than a year earlier, exceeding the BOJ’s 2 per cent inflation target for the first time in seven years, due largely to rising fuel and food costs.

BOJ officials have repeatedly stressed that such cost-push inflation will prove temporary and will not prompt the central bank to tighten monetary policy.
Source: Reuters

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