By Leika Kihara
WASHINGTON, April 18 (Reuters) – The yen may come under further pressure if markets see the Bank of Japan as being too slow in addressing inflationary risks, Asian Development Bank President Masato Kanda said.
Investors buy dollars in times of global stress in part because the U.S. is an oil exporter, but even when such positions are unwound the yen fails to rise much against the dollar, Kanda, who was formerly Japan’s top currency diplomat, told reporters late Friday.
“The biggest reason is interest rate differentials (between the U.S. and Japan). With markets particularly focusing on what the U.S. Federal Reserve could do, Japan’s currency will be left behind if many people think the BOJ will be behind the curve” in addressing inflationary risks, he said.
Investors may also sell yen if they worry about Japan’s fiscal sustainability, Kanda said during his visit to Washington to attend this week’s meetings of the International Monetary Fund and World Bank Group.
An advocate of expansionary fiscal policy, Prime Minister Sanae Takaichi has rolled out subsidies to cap gasoline prices and pledged to keep boosting spending to support the economy.
Critics say such moves would add to Japan’s huge public debt, which is already twice the size of its economy and the largest debt-to-gross-domestic-product ratio among major countries.
While Japan is not the only country using subsidies to curb fuel bills, such measures should be targeted and temporary to avoid distorting market pricing, Kanda said.
“Price fluctuations are instruments that help society adapt to new norms. In general, it’s inappropriate to switch them off and hamper changes in public behavior,” he said.
Instead of blanket subsidies, countries should spend more on investment to boost energy efficiency, increase oil reserves and take steps to diversify energy consumption, Kanda said.
The dollar dropped to its lowest in seven weeks on Friday after Iran said the Strait of Hormuz was open, raising hopes the Middle East conflict is nearing an end.
The dollar also weakened against the yen, though with prospects fading for an interest rate hike in April the Japanese currency remained near the 160-per-dollar mark that has sparked past currency interventions. The dollar stood around 158.61 yen on Friday.
Wary of hurting a fragile economy, the BOJ has kept rates low even as rising import costs from a weak yen and steady wage gains have kept inflation around its target for nearly four years.
Kanda, who presided as Japan’s top currency diplomat for three years until July 2024, combated the yen’s relentless falls with record foreign exchange intervention – a move that earned him the nickname “Mr. Yen.”
(Reporting by Leika Kihara;Editing by Dan Burns and Chizu Nomiyama )
