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Insights from Japan's currency diplomat on Central Bank decisions and global risks

Japan's currency diplomat on Central Bank decisions and global risks

Masato Kanda, a key figure in Japan's financial landscape as its top currency diplomat, is meticulously monitoring the potential ramifications of central bank decisions on the market. With speculation swirling around the anticipated cessation of negative interest rates in Japan, concerns are mounting regarding the possibility of volatile asset movements.

Serving as the vice finance minister for international affairs, Kanda chose not to comment on the escalating market expectations that the Bank of Japan (BOJ) might put an end to negative rates in April, deeming it an event of considerable importance that is being closely observed by currency authorities.

In a recent interview conducted on Wednesday, Kanda acknowledged the heightened market attention on the timing and pace of U.S. interest rate cuts and the prospective direction of the BOJ's policies. He expressed apprehensions that these factors might serve as a pretext for speculative trading.

Kanda emphasized his ongoing communication with financial authorities, including the BOJ and the U.S. Federal Reserve, underscoring the continuous scrutiny of the repercussions of each central bank decision on financial markets.

Given his role in overseeing currency policy, Kanda maintains close ties with BOJ executives, particularly Governor Kazuo Ueda. Notably, Kanda previously oversaw yen-buying currency interventions in 2022, aimed at mitigating a sharp decline in the yen. This decline was partly attributed to the BOJ's ultraloose monetary policy and the aggressive interest rate hikes by the U.S. Federal Reserve.

Governor Ueda, who assumed office in April of the previous year, has embarked on dismantling the massive stimulus implemented by his predecessor, including relaxing the BOJ's control on long-term interest rates.

The current focus of market expectations is a potential increase in the BOJ's short-term rate target from the current minus 0.1%. While the ultraloose policy remained unchanged in the most recent update, the BOJ provided a clear signal that the end of negative rates is on the horizon.

Kanda acknowledged the positive impact of the BOJ's ultraloose monetary policy in pulling Japan out of a deflationary state and revitalizing the economy. However, he also expressed a rare note of caution, acknowledging the negative side-effects of prolonged monetary easing.

In describing the desirable scenario as stable currency rates reflecting economic fundamentals, Kanda highlighted that exchange-rate intervention is just one of many tools available to address excess market volatility. Moreover, he noted a potential weakening in the yen's status as a "safe" currency, traditionally grouped with the Swiss franc in that category.

Shifting focus to global economic risks, Kanda expressed concerns about China facing intensifying deflationary pressure and a sluggish property market with reduced demand. This situation could negatively impact economies heavily dependent on exports to China. In contrast, he observed the U.S. economy proving stronger than expected, increasing the likelihood of a soft landing.

Highlighting the pivotal role of the U.S. economy in global recovery, Kanda warned of potential risks if U.S. monetary conditions remain tight for an extended period amid high inflation. This could potentially dampen consumption, destabilize the corporate sector, and adversely affect global and Japanese growth. Additionally, it could exacerbate debt problems in emerging economies.


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