How much impact does the depreciation of the Japanese yen have on inflation?

On June 19th, the minutes of the April policy meeting of the Bank of Japan showed that the Bank of Japan debated the impact of the depreciation of the yen on prices. Some decision-makers expressed that if inflation exceeded expectations, the Bank of Japan may raise interest rates earlier than expected.

Firstly, several members of the nine member central bank committee stated that exchange rate fluctuations change the central bank's view on prospects and risks, and the central bank must respond with monetary policy. The weak yen may have a greater and more lasting impact on inflation than in the past, as companies are already eager to raise prices and wages.

Secondly, the Bank of Japan has maintained interest rates around zero and emphasized its growing belief that inflation will continue to reach its target of 2% in the coming years, indicating that the bank is prepared to raise borrowing costs later this year. For the market: pricing pressure in the service industry. The 2.8% increase in high labor cost service prices indicates imminent inflationary pressure, which may prompt the Bank of Japan to raise interest rates. Investors and businesses should remain vigilant and pay attention to how rising service costs may affect broader market dynamics and corporate profit margins. The sustained increase in wages and the continued transfer of costs to service prices are the key factors determining future interest rate hikes. These data may indicate a shift in Japan's long-term era of ultra-low interest rates and may affect global economic strategy and investment flows.

Furthermore, the latest index from the Bank of Japan shows that service prices between Japanese companies increased significantly by 2.8% in April compared to the same period last year, the fastest increase since August 2020. The Bank of Japan Index climbed to 106.4 in April, the highest level since data collection began in 1985, highlighting the steady rise in wages driving companies to raise service prices. This trend is crucial for the Bank of Japan as it is considering raising interest rates from near zero levels. Software development and other high labor cost services are more closely linked to wage increases than low labor cost services, which are more affected by global commodity prices. A recent research report by the Bank of Japan pointed out that the price increase of high labor cost services in various industries is accelerating, reflecting broader inflationary pressures.

However, Bank of Japan Governor Kazuo Ueda stated in parliament that the central bank may raise interest rates in July based on available economic and price data at the time. The discussions at the meeting highlighted the Bank of Japan's consistent shift in stance, which is that the depreciation of the yen only has a temporary impact on inflation and therefore will not directly affect the timing of future rate hikes. If inflation exceeds expectations due to the depreciation of the yen, the Bank of Japan may achieve monetary policy normalization earlier than expected, indicating that the central bank's stance is becoming increasingly hawkish. The Japanese Ministry of Finance team stated in a draft that Japan must create an environment that makes government bonds attractive to financial institutions through the issuance of short-term bonds. The proposal highlights the Bank of Japan's exit from aggressive stimulus policies to prepare the government for an era of rising interest rates, which will increase the financing cost of the country's massive public debt. The Bank of Japan has also decided to begin reducing its massive bond purchases and reducing its holdings. At present, the total amount of bonds held by the Bank of Japan is 589 trillion yen, accounting for about half of the total amount of Japanese government bonds sold in the market. The weakening influence of the Bank of Japan highlights the necessity for the government to find stable buyers of Japanese treasury bond and avoid the bond sell-off that triggered a devastating surge in bond yields.

In summary, if the economic and price trends align with the central bank's predictions, the central bank may raise interest rates to levels higher than the current market expectations. The depreciation of the yen has made the policy path of the Bank of Japan more complex. The depreciation of the Japanese yen will accelerate inflation by pushing up the prices of imported goods, and on the other hand, it will cause an increase in the cost of living, thereby affecting consumption and questioning the strength of the Japanese economy.