Yen collapsed because market finds Japanese central bank “too slow”, says El-Erian

The movement that led the Japanese yen to briefly reach, this Wednesday (27), its lowest level against the dollar since July 1990, attracted the eyes of thousands of financial agents to Japan.

In the assessment of Mohamed El-Erian, economist, president of Queens’ College at the University of Cambridge and former CEO of the American management company Pimco, the phenomenon is a reflection of the market’s view that the process of monetary normalization led by the Bank of Japan (BoJ ) is “very slow and long”.

The vision was shared by the economist on his social networks this Wednesday (27). According to him, the market is “testing the appetite” of the authorities for exchange rate intervention.

This Wednesday, the dollar briefly rose to 151.97 yen, a value that had not been touched since July 1990, compared to 151.52 yen seen on Tuesday (26).

Earlier today, Naoki Tamura, who is a member of the BoJ board and who has a more considered view hawkish (inclined towards monetary tightening), stated that the Japanese monetary authority should advance “slowly and steadily” in the process of normalizing its looser monetary policy, which hinted that another increase in rates could occur, if inflationary pressures increased.

On the other hand, the advisor reported that the risk of the Bank of Japan being forced to aggressively tighten monetary policy to contain excessive price increases remains small.

Tamura’s speeches had a direct impact on the market, with effects on the exchange rate and the yields of the country’s sovereign bonds.

This month, the BoJ abandoned its negative interest rate policy and carried out the first rate hike in 17 years. The decision represented a reformulation of the monetary easing framework that aimed to end the trend of deflation in the country.

At the time, the BoJ decided to guide short-term interest rates to a range between zero and 0.1%, judging that its objective of achieving stable inflation of 2% is “in sight”.

The move made Japan’s monetary authority the last to exit negative rates and end a period in which authorities around the world sought to sustain growth through cheap money and unconventional monetary tools.

Emergency meeting

The strong weakening of the Japanese yen prompted Japan’s three main monetary authorities to hold an emergency meeting this Wednesday (27) to indicate that they are ready to intervene in the market. The objective, according to them, is to prevent what they described as disorderly and speculative movements in the currency.

The meeting was attended by members of the Bank of Japan (BoJ), the Ministry of Finance and the Financial Services Agency of Japan.

A weaker yen makes exports from the world’s fourth-largest economy cheaper but could raise the prices of energy and other Japanese imports, fueling inflation and raising the cost of living.

This undermines the central bank’s objective of achieving a sustainable 2% inflation level through wage growth and increased household purchasing power, rather than cost-driven inflation.

(With Reuters)