BoJ Faces Credibility Crisis Over Yen Policy

Japanese currency, the Yen (JPY), is facing renewed pressure as markets question its commitment to tighter policy. According to Commerzbank's Thu Lan Nguyen, the Bank of Japan (BoJ) faces a challenge in maintaining credibility on its stance towards the Yen. The BoJ's latest rate hike failed to satisfy both domestic officials and international partners.

The mere threats of FX intervention are seen as insufficient by markets, and delayed or cautious tightening could undermine both Yen stability and economic growth. Nguyen warns that sooner or later, the BoJ will have to back up its words with action.

The fundamental problem is the persistent uncertainty surrounding the BoJ's priorities. On one hand, it wants to prevent a further sharp depreciation of the yen. Achieving this would require a credible signal that additional and potentially faster rate hikes are on the table.

Nguyen compares the situation with Sweden's Riksbank, which temporarily raised its policy rate to 500% in the early 1990s in an attempt to defend the krona, only to abandon its exchange-rate peg shortly thereafter. She argues that time is running out for the BoJ and that the longer it tries to balance currency stability against economic growth, the greater the risk that it ultimately loses control of both.