BOJ Gov. Ueda finally toughens message on the weak yen

Bank of Japan Gov. Kazuo Ueda is starting to take some ownership of the weak yen — not before time.

The end of negative interest rates, a step rich in imagery but small in substance, did not do much to stem the currency’s retreat. Something more is needed, absent a decisive shift in the trajectory of the dollar, the lodestar of the global financial system.

For the broad constellation of economic officials within Japan, it is now all hands on deck. As a general rule, BOJ chiefs are comfortable ceding yen policy to the Finance Ministry, with the monetary authority acting as the ministry’s banker.

But priorities seem to be shifting. Contrary to the almost nonchalant tone Ueda took toward foreign exchange at his last press conference, Ueda is now becoming more assertive. He is talking about how shifts in currencies can feed into inflation.

The yen is becoming less an abstraction and more of a factor in how the BOJ thinks about moving toward a more normal monetary stance. In other words: how far and how fast to lift interest rates.

The shift can be traced to earlier this month, specifically to a meeting between Ueda and Prime Minister Fumio Kishida on May 7 that the governor followed with muscular remarks the next day. "Foreign exchange rates make a significant impact on the economy and inflation,” Ueda said in response to questions in parliament. "Depending on those moves, a monetary policy response might be needed.”

This was significant because Ueda had strived during his 13 months in office to avoid saying anything newsworthy when addressing lawmakers. In a May 8 speech, he noted the difficulties that companies can encounter when exchange rates are sharp and one-sided. That was followed by the release of a summary of the BOJ’s April board meeting that sounded more hawkish than Ueda did when addressing reporters immediately after that gathering.

In response to this shift, Bank of America brought forward its forecasts for rate hikes, favoring the next step in July, sooner than the prior projection of September. A former BOJ chief economist told Bloomberg News an increase might even be on the table next month.

Having allowed expectations to evolve, it would be perilous for Ueda to backtrack. Were he to do so, the response of traders could be vicious. Dealers have been chastened — a bit — by a few rounds of intervention that strengthened the currency to around ¥155 per greenback from ¥160, a 34-year low.

Tokyo is likely not finished with the bear market. To effectively constrain the yen’s decline, the various arms of government need to be consistent. The Finance Ministry has for months been jawboning the market, reminding markets of its antipathy toward what it sees as extreme moves.

With Ueda coming around to the cause, a key blank has been filled in. To underscore the importance of consistency, Finance Minister Shunichi Suzuki last week stressed the importance of teamwork. "We will continue to closely communicate with the BOJ to ensure that there is no friction between our mutual policy objectives,” he said.

Ueda made clear during the first year of his term that he was uncomfortable with the policy settings he inherited from Haruhiko Kuroda, an uber-dovish framework built for the days of deflation or too-low inflation.

From around January, it was clear Ueda's intention was to rid Japan of that arrangement. The first step was modest, lifting the main rate from minus 0.1% to around zero in March. Ueda did not let signs of softness in growth prevent him from moving, nor is he likely to be greatly bothered by a contraction in gross domestic product last quarter.

If the need to combat yen softness helps lay the ground for further hikes and a more normal — or less abnormal — stance, then it can probably only assist Ueda.

These new tactics are not without risk. Ueda does not want to entirely outsource policy to currency defense. Given that the dollar is enjoying a broad bull run, driven by the United States Federal Reserve’s high-for-longer approach to rates, the tools that Japan has at its disposal are limited.

If the BOJ and Finance Ministry are on the same page, that is of some use. And if it helps Ueda get where he wanted to go anyway, then so much the better. Developments in Japan are not the core driver of the yen’s underperformance this year, but Tokyo does have some agency.

The good news is that interest rates are where they should be in this drama: front and center.