Yen drops as Bank of Japan maintains key interest rate

The yen weakened against the dollar Thursday after the Bank of Japan kept borrowing costs unchanged, extending a retreat for the currency that came after the Federal Reserve forecast fewer rate cuts.

The BoJ said after a two-day policy meeting that it would hold rates at around 0.25 percent, pushing the yen cheaper than 155 per dollar, compared with 153.66 on Wednesday.

Although the bank said in its policy statement that “Japan’s economy has recovered moderately” and “is likely to keep growing”, it also pointed to risks ahead.

These include “developments in overseas economic activity and prices, developments in commodity prices, and domestic firms’ wage- and price-setting behaviour”.

The Fed on Wednesday cut interest rates by a quarter point, its third straight reduction.

But it signalled a slower pace of cuts ahead as inflation remained sticky and uncertainty surrounds President-elect Donald Trump’s economic plans.

Japanese businesses are also wary about the trade and investment environment, given Trump’s pledge to impose tariffs on imports.

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Tsuyoshi Ueno, senior economist at NLI Research Institute, told AFP ahead of Thursday’s decision that one reason the BoJ did not hike was that “the picture of next year’s wage increases will be clearer in January”.

Political factors were another reason, according to Ueno.

“As the minority government is discussing budget and tax reforms involving the opposition… it would be bad timing for the BoJ to hike its rate” as that could cool the economy, he said.

The government recently passed an extra budget worth nearly 14 trillion yen ($90 billion) to help pay for a massive economic stimulus package.

It includes handouts for low-income households, fuel and energy subsidies and assistance to small businesses.

Prime Minister Shigeru Ishiba is hoping the funds will lift the economy but also boost his popularity after the ruling coalition’s worst election result in 15 years.

Ishiba has also promised to spend 10 trillion yen through 2030 to boost Japan’s semiconductor and artificial intelligence sectors to help the nation regain its tech edge.

Source: AFP