World Economy

Japan’s Dovish Monetary Policy Imploding

Japan’s Dovish Monetary Policy ImplodingJapan’s Dovish Monetary Policy Imploding

Japan’s Finance Minister Taro Aso has ratcheted up the warning against a rapid rise in the yen as the country’s ultra-dovish monetary policy implodes and threatens to condemn the economy to continued stagnation.

Although it recovered slightly in Asian trading on Friday, the US dollar fell below 108 yen for the first time in 17 months on Thursday with investors betting that Japan would refrain from intervention. The yen has risen 12% against the greenback this year, Yahoo reported.

Aso said that the government, which wants a lower yen in order to fire exports and reverse years of weak growth as part of Prime Minister Shinzo Abe’s so-called Abenomics plan, would take steps as needed to counter “one-sided” moves in the currency market.

The Bank of Japan surprised investors earlier this year when it announced a move towards negative interest rates in the hope of spurring investment and keeping the yen low. But the currency has instead surged, helped by a falling US dollar and the yen’s traditional position as a safe haven in times of concern about the global economy.

“A rapid move toward either yen rise or yen fall is not desirable. It is desirable that currencies are stable at levels that match the economy’s fundamentals,” Aso told reporters after a cabinet meeting on Friday.

  Sense of Urgency

“As the G20 confirms, excess volatility and disorderly moves in the exchange market hurts (economy), so we are watching currency moves with a sense of urgency. We will take necessary steps under certain circumstances,” he said.

The surging yen has also hurt share prices in Japan. The Nikkei average has fallen sharply in inverse relation to the yen in recent weeks. It was up slightly on Friday but other markets in Asia were down.

He declined to comment on the possibility of intervention in the foreign exchange market, but many observers believe Japan’s hands are tied by the upcoming G7 summit to be hosted by Abe on Kashiko Island in May.

Jeffrey Gundlach, the widely followed investor who runs DoubleLine Capital, said late on Thursday that negative interest rates implemented by some major central banks, notably in Japan, were having the opposite effect.

“The negative interest rate experiment seems to be backfiring,” Gundlach said. “The best evidence of negative interest rates backfiring is the yen versus the dollar.”

The European Central Bank has also moved towards negative rates but the eurozone is still struggling to reverse years of anaemic growth.