Japan’s Kiuchi: Government conditions for declaring an official end to deflation remain unmet

Japan still lacks the conditions needed to officially declare an end to deflation, Economy Minister Minoru Kiuchi said on Friday. Before making such a declaration, the government will assess a range of factors to ensure the country does not return to persistent price declines, Kiuchi added.

Kiuchi’s Key Remarks

Any government decision to officially declare an end to deflation will take account of CPI, the GDP deflator and the drivers of inflation trends.

Hopes the BoJ conducts policy appropriately in line with the joint statement with the government, which stresses the need for stable, sustainable price stability.

The conditions required for the government to officially declare an end to deflation remain unmet.

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USD/JPY Trades Lower

A 1.00% daily decline leaves USD/JPY at 156.55 at the time of writing.

Japanese Yen: Key Questions

Japanese Yen: Main Market Drivers

Among the most actively traded currencies globally, the Japanese Yen (JPY) broadly reflects Japan’s economic performance. More specific influences include Bank of Japan policy, the gap between Japanese and US bond yields, and traders’ appetite for risk, alongside other factors.

Bank of Japan Policy and the Yen

Currency control falls within the Bank of Japan’s mandate, making its actions important for the Yen. Direct intervention in foreign exchange markets has occasionally been used by the BoJ, usually to weaken the currency. Political concerns among Japan’s main trading partners, however, limit how often it intervenes. Between 2013 and 2024, the BoJ’s ultra-loose monetary policy weakened the Yen against its major peers as the policy gap with other leading central banks widened. More recently, a gradual unwinding of that ultra-loose stance has provided the Yen with some support.

Japanese and US Bond Yield Gaps: Impact on the Yen

By maintaining ultra-loose monetary policy over the past decade, the BoJ increasingly diverged from other central banks, notably the US Federal Reserve. The resulting widening in the yield gap between 10-year US and Japanese bonds benefited the US Dollar relative to the Japanese Yen. That gap is now narrowing as the BoJ’s 2024 decision to gradually exit ultra-loose policy combines with interest-rate cuts by other major central banks.

Risk Sentiment and the Yen’s Safe-Haven Role

Investors often regard the Japanese Yen as a safe haven, making them more inclined to move funds into the currency during market stress because of its perceived reliability and stability. As a result, periods of turbulence are likely to lift the Yen against currencies considered riskier investments.