Asian Development Bank President Masato Kanda warned that the Japanese yen could face further depreciation if market participants view the Bank of Japan (BOJ) as moving too slowly to counter inflationary risks. Speaking to reporters late Friday during a visit to Washington for meetings of the International Monetary Fund and World Bank Group, Kanda said the currency has been vulnerable when investors interpret the BOJ as falling behind other central banks.
Kanda, who formerly served as Japan's top currency diplomat, said one dynamic explains why the yen often fails to recover strongly even after risk-driven dollar positions are reversed. "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.
He added that investor behavior in times of global stress contributes to dollar demand, noting that purchases of dollars are in part driven by the U.S. being an oil exporter - a factor investors consider when seeking safe-haven or liquid assets. Even when such positions are unwound, Kanda said, the yen often does not appreciate much against the dollar.
Kanda also pointed to Japan's fiscal outlook as a potential source of downward pressure on the currency. He warned investors may sell yen if they become concerned about fiscal sustainability. His remarks came amid recent policy moves by Japan's government under Prime Minister Sanae Takaichi, who has introduced subsidies to cap gasoline prices and pledged to continue raising spending to support the domestic economy.
Critics of those subsidy measures argue they would add to Japan's already very large public debt. The debt is described as twice the size of the country's economy and the largest debt-to-gross-domestic-product ratio among major economies - a fact that Kanda underscored when discussing investor sensitivities to fiscal policy.
On the subject of subsidies to blunt energy costs, Kanda urged caution. He said such measures should be limited and time-bound to avoid distorting market signals. "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.
Rather than broad-based subsidies, Kanda recommended that governments prioritize investment aimed at improving energy efficiency, building oil reserves and diversifying energy consumption. He argued these steps would better support longer-term resilience without dampening market mechanisms that guide adaptation.
Market moves on Friday reflected shifting assessments of geopolitical and monetary risks. The dollar fell to a seven-week low after Iran said the Strait of Hormuz was open, which raised hopes the Middle East conflict might be winding down. The U.S. dollar also eased against the yen, but with market expectations weakening for a Federal Reserve interest rate increase in April, the yen remained close to the 160-per-dollar level that has previously triggered currency intervention by Japanese authorities. On Friday the dollar traded around 158.61 yen.
Kanda noted the BOJ has maintained low interest rates to avoid harming a fragile domestic economy, despite rising import costs driven by a weaker yen and steady wage gains that have kept inflation near the BOJ's target for almost four years. He brings direct experience to his observations: as Japan's top currency diplomat for three years until July 2024, he led record foreign exchange intervention to counter the yen's falls, an effort that earned him the nickname "Mr. Yen."
Key developments cited in this coverage include concerns over the pace of BOJ policy tightening, the role of interest rate differentials in currency moves, the market impact of fiscal policy choices in Japan, and recent dollar movements tied to geopolitical developments and shifting Fed expectations.