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BoJ Report: Impact of weak Japanese Yen shock on inflation bigger than that from oil shock
A report released by the Bank of Japan (BoJ) on Thursday revealed that the impact of weak Japanese Yen shock on inflation bigger than that from oil shock. The weakening of the JPY pushes up prices for wide range of goods services, thereby gives bigger boost to consumer inflation excluding fresh food, energy.
Key quotes
Impact of weak Yen shock on inflation bigger than that from oil shock.
Weak Yen pushes up prices for wide range of goods services, thereby gives bigger boost to consumer inflation excluding fresh food, energy.
Oil price rises put fairly big upward pressure on smaller number of goods related to energy, which means impact on CPI excluding fresh food, energy isn't very big.
Weak Yen shock expands wage, profit margin and leads to increase in GDP deflater, while energy shock squeezes wage, profit margin and leads to decrease in GDP deflater.
Under risk scenario projecting elevated oil prices, weaker Yen, stock falls, real GDP forecasts will be -0.1% point to 0.2% point lower in fiscal 2026-2028 than BoJ's median baseline projections.
Under risk scenario, core consumer inflation will overshoot significantly from BoJ's median baseline projections, could hover around 3% in fiscal 2026, 2027.
Such overshoot of inflation could heighten medium-, long-term inflation expectations.
If there is big supply chain disruption, real GDP could undershoot sharply while bottlenecks could lead to non-linear rise in inflation.
BoJ will scrutinise various risk factors more than ever as growth, price developments could sharply deviate from its baseline projections depending on Middle East developments.
Market reaction
As of writing, the USD/JPY pair is up 0.02% on the day at 160.48.
Japanese Yen FAQs
The Japanese Yen (JPY) is one of the world’s most traded currencies. Its value is broadly determined by the performance of the Japanese economy, but more specifically by the Bank of Japan’s policy, the differential between Japanese and US bond yields, or risk sentiment among traders, among other factors.
One of the Bank of Japan’s mandates is currency control, so its moves are key for the Yen. The BoJ has directly intervened in currency markets sometimes, generally to lower the value of the Yen, although it refrains from doing it often due to political concerns of its main trading partners. The BoJ ultra-loose monetary policy between 2013 and 2024 caused the Yen to depreciate against its main currency peers due to an increasing policy divergence between the Bank of Japan and other main central banks. More recently, the gradually unwinding of this ultra-loose policy has given some support to the Yen.
Over the last decade, the BoJ’s stance of sticking to ultra-loose monetary policy has led to a widening policy divergence with other central banks, particularly with the US Federal Reserve. This supported a widening of the differential between the 10-year US and Japanese bonds, which favored the US Dollar against the Japanese Yen. The BoJ decision in 2024 to gradually abandon the ultra-loose policy, coupled with interest-rate cuts in other major central banks, is narrowing this differential.
The Japanese Yen is often seen as a safe-haven investment. This means that in times of market stress, investors are more likely to put their money in the Japanese currency due to its supposed reliability and stability. Turbulent times are likely to strengthen the Yen’s value against other currencies seen as more risky to invest in.