During the recent G7 Finance Ministers' meeting in Italy, Japan reiterated its determination to address the excessive depreciation of the yen. Despite recent bond yields hitting a 12-year high, they have failed to halt the yen's continuous decline.
The efforts of the government and the central bank highlight the dilemma policymakers face: on one hand, they need to curb the sharp depreciation of the yen that affects consumption, and on the other hand, they must keep borrowing costs low to support a fragile economy.
Under Japan's lobbying, the G7 finance ministers reaffirmed their commitment to warn against excessive volatility in foreign exchange rates in the communiqué issued after the meeting on Saturday.
This agreement was reached after Japan's top foreign exchange official Masato Kanda stated on Friday that Tokyo was ready to take action "at any time" to address excessive yen volatility.
He said, "If there is excessive volatility that adversely affects the economy, it is justified to take action."
Bank of Japan (BOJ) Governor Kazuo Ueda also attended the G7 meeting, stating that weak consumption or rising bond yields would not hinder the normalization of monetary policy.
Ueda said on Thursday that the decline in first-quarter GDP has not changed the view that Japan's economy is on track for a moderate recovery. Analysts say that if the economy develops as expected, the BOJ might raise interest rates in the coming months.
He has not commented on the recent 10-year bond yields hitting a 12-year high, partly due to market expectations that the BOJ will soon fully scale back bond purchases.
When asked about the recent rise in Japan's long-term interest rates on Saturday, Ueda said, "Our basic stance is to let long-term interest rates be determined by the market."
These remarks came after a series of hawkish signals from the BOJ, leading to market expectations of a near-term rate hike or a reduction in massive bond purchases.
Ueda ruled out the possibility of using monetary policy to influence the yen's movements. However, after the suspected yen-buying interventions by the government on April 29 and May 2, he intensified his rhetoric on the impact of yen depreciation on inflation.
A Reuters poll showed that many analysts expect the BOJ to raise interest rates in the third or fourth quarter of this year.
