Why the Yen Has Weakened and What Japan Is Doing About It

The Bank of Japan stands out among major central banks with its commitment to maintain rock-bottom interest rates to boost a moribund economy, even as surging inflation worldwide spurs the U.S. Federal Reserve to roll back stimulus and raise rates. As a result, the yen has weakened dramatically against the dollar. While BOJ Governor Haruhiko Kuroda has said he’s not bothered by a weaker yen, Japan’s government bonds haven’t been immune from the global rout spurred by rising prices. That’s putting extraordinary strain on a BOJ policy known as yield curve control.

1. What’s a yield curve?

It’s a way to show the difference in the reward investors get for choosing to buy shorter- versus longer-term debt. Most of the time, they demand more for locking away their money for longer periods, with the greater uncertainty that brings. So yield curves usually slope upward.

2. What’s the difference in Japan?

Normally market forces determine the yield curve. The BOJ takes a more hands-on approach. Its policy of yield curve control, adopted in 2016, aims to keep 10-year government bond yields around zero with 25 basis points of wiggle room either side -- part of its effort to flood the economy with cheap money to try to revive growth. But its control came under tremendous pressure this year because the Fed started raising interest rates, prompting investors to speculate that Japan would follow suit, meaning it would allow the yield to go higher.

3. What’s the BOJ’s response?

The bank intervened in the market, aggressively buying government debt to keep a lid on the yield. The bank repeatedly offered to buy an unlimited amount of 10-year Japanese government bonds at fixed yields. It also bought longer-term debt and ramped its scheduled buying on March 30 and its purchase plans for the following three months. The bank has used fixed-rate buying several times before, including purchases of 1.6 trillion yen ($13 billion) on July 30, 2018, but never for such a sustained period. As a result, 10-year yields eased back to 0.21% on March 30, according to data compiled by Bloomberg.

4. Why is the yen so weak in 2022?

The biggest reason is the move toward higher interest rates in the U.S., making dollar-denominated assets more attractive for investors seeking higher returns. Kuroda -- who famously rattled markets with a surprise shift to negative interest rates in 2016, before settling on yield curve control -- keeps saying that it’s too early to cut back monetary easing and raise rates in Japan, where inflation remains relatively muted. The different stances are helping weaken the yen. Other factors include the strength of the U.S. economy and its labor market while Japan continues to lag behind its peers in recovering to pre-pandemic levels.

5. What does the weak yen mean for the economy?

Historically Japan has welcomed a weakening of the yen as it helps exporters including carmaking giant Toyota Motor Corp. when they repatriate profits made overseas. In the past decade, former Prime Minister Shinzo Abe ushered in a period of a much weaker yen largely to the applause of the business world. The mood is shifting now though given that costs for commodities and other inputs are rising at the fastest pace in four decades. A sharply weaker yen amplifies that pain. The average household is also feeling the bite from higher prices for imports from energy to food. With the central bank unlikely to budge, Prime Minister Fumio Kishida is left trying to temper the impact through government spending, such as fuel subsidies.

6. Where does this leave Kuroda?

It’s an awkward way to spend the last year of his second five-year term as governor. But he’s shaken off any concerns about the negative side effects of a weaker yen, sticking to protecting the credibility of his policy framework. Kuroda often points out it’s the finance ministry, not the BOJ, that is in charge of foreign exchange matters. Japan’s chief currency official said in March he’d discussed the foreign exchange as a major issue with his U.S. counterpart. What happens after Kuroda leaves in April 2023 is another matter. Kishida may choose a successor who takes a more conventional line on policy.