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Yen Slide Risks Heighten for BOJ After Trump Victory

Trump’s U.S. election win triggers dollar rally, raising risks for the BOJ to intervene and manage yen slide back to three-decade lows.

Trump's Victory and Its Impact on BOJ's Yen Policy

TOKYO (Reuters) - The recent U.S. presidential election victory by Republican Donald Trump has led to a dramatic rally in the U.S. dollar, increasing the risks for the Bank of Japan (BOJ) to intervene and raise interest rates. This potential move comes in response to the yen's slide toward three-decade lows, which has placed considerable pressure on Japan's economy and policymaking.

Yen's Slide and the BOJ's Role in Managing Economic Stability

Trump's victory, alongside his proposed economic policies such as tax cuts and tariffs, has driven investor optimism about U.S. growth, leading to a significant strengthening of the dollar. As a result, the yen recently plunged to a three-month low of 154.71, which is a significant departure from the higher value of 140.62 seen in mid-September. Although a weaker yen can provide a boost to Japan's export sector, the currency's depreciation has negative side effects, primarily raising the costs of imports, including crucial food and fuel supplies.

This rising import cost, exacerbated by inflation, has started to hurt domestic consumption in Japan. The sharp increase in prices for goods and services has played a role in diminishing public support for the ruling coalition, as demonstrated by last month's general election results.

The Pressure on the BOJ and the Potential for a Rate Hike

Given the worsening situation, Japan's top currency diplomat, Atsushi Mimura, issued stern warnings on Thursday about the potential consequences of a continued yen slide. The BOJ has already taken action in the past to address sharp currency declines, raising interest rates to 0.25% in July after the yen dropped to near 162 against the dollar. Another significant depreciation could compel the BOJ to consider further rate hikes to curb inflation and stabilize the currency.

The previous rate hike in July followed heavy political pressure from Japanese lawmakers, who called for decisive action. While the BOJ's move was partly driven by the yen’s drop, it also signified a broader shift towards normalization of Japan's ultra-loose monetary policy.

BOJ's Possible December Rate Hike Amid Yen Slide Concerns

Despite debates within the BOJ, many analysts believe the central bank could increase interest rates again by March, especially if the yen slide continues at its current pace. However, there is growing speculation that the BOJ might move sooner, with some economists predicting that December could see a rate hike if the yen weakens further. The BOJ has expressed its sensitivity to currency fluctuations and its focus on managing the inflationary effects of a weak yen.

In particular, the BOJ has signaled that it will act swiftly if the yen approaches the 160-to-the-dollar mark again. This level is seen as a crucial threshold, beyond which Japanese authorities may feel forced to intervene not only through rate hikes but also through direct currency market intervention.

Coordinated Action Between BOJ and Japanese Government

As Japan has experienced in the past, if the yen continues its downward trajectory, it could lead to coordinated intervention between the BOJ and the Japanese government. This partnership was evident in July when Japan spent over 5 trillion yen ($35.8 billion) in foreign exchange market interventions to prevent the yen from weakening further. The scale of these interventions demonstrates the significant resources Japan is willing to deploy to stabilize the currency and its economy.

Following the BOJ's hawkish statements regarding near-term rate hikes, the dollar briefly fell toward the 150-yen level. This intervention signals the BOJ's commitment to addressing the yen slide, although it remains to be seen whether more drastic action will be required if the yen continues to weaken.

Looking Ahead: Risks of Yen Depreciation and Future Policy Responses

In conclusion, the risks surrounding the yen slide are substantial. With Japan's inflation rising and the currency weakening, the BOJ faces increasing pressure to act decisively. Whether through interest rate hikes or market intervention, the BOJ's ability to manage the yen’s depreciation will be critical for the country's economic stability. The ongoing battle with the yen slide remains a key focus for both domestic policymakers and international investors, with the market closely watching the BOJ's next moves.