Yen depreciation against the US dollar triggers inflation alerts; the central bank's rate hike pace may be forced to accelerate.

The Bank of Japan faces a tricky decision dilemma: the yen’s continuous weakness against the US dollar is pushing up import costs and threatening to drive up domestic prices. According to Bloomberg, BOJ officials are increasingly aware of this exchange rate pressure’s substantive threat to inflation, which may force them to reconsider their original interest rate hike plans or even accelerate policy adjustments.

The inflation risks stemming from currency depreciation are evolving from a marginal issue into a core policy concern. The BOJ just raised its benchmark interest rate to 0.75% last month (reaching a thirty-year high), but the yen against the dollar has yet to show significant improvement. Officials have observed a key phenomenon: as the yen continues to depreciate, companies are increasingly inclined to pass rising import costs directly to consumers, which could further intensify inflationary pressures.

The Inflation Transmission Chain of Yen Depreciation: How Import Costs Drive Prices

Yen depreciation typically has two effects. On one hand, rising import costs increase inflationary pressure; on the other hand, exporters’ profits are boosted. However, some BOJ officials point out that when the yen remains weak, the negative effects of this mechanism may be underestimated.

The transmission path from rising import costs to consumer prices is as follows: first, yen depreciation causes import raw materials and goods prices to rise; second, domestic companies facing higher procurement costs begin to adjust their product pricing; finally, these price adjustments are reflected in the goods on supermarket shelves. Currently, Japan’s inflation is approaching the BOJ’s 2% target, meaning any additional pressure from exchange rates could push beyond the target level.

The Central Bank’s Dilemma: Policy Game over the Timing of Rate Hikes

The BOJ’s stance at the policy meeting at the end of January has been relatively cautious. Insiders say officials are currently inclined to keep interest rates at 0.75%, a decision made after careful consideration. However, this does not mean the rate hike process will come to a halt. Private economists generally expect the BOJ to proceed with rate increases roughly every six months, implying that the next move was originally planned for a few months later.

But the exchange rate trend is disrupting this plan. Bloomberg sources indicate that officials are inclined to implement policy adjustments promptly rather than delay excessively. This suggests that if yen depreciation further intensifies inflationary pressures, the BOJ may be forced to break from its original pace of rate hikes and initiate a new round of policy tightening earlier. It is a delicate timing game—acting too early could harm economic growth, while delaying too long might let inflation spiral out of control.

Business and Political Pressure Mounts, Yen Movement Becomes a Focus

Market pressures are intensifying this dilemma. Influenced by news of an early general election, the yen against the dollar fell to near an 18-month low in the following months (briefly touching 158.68), then rebounded slightly amid warnings from currency authorities, but the overall depreciation trend remains clear.

Meanwhile, Japanese businesses are also voicing concerns over yen depreciation. As Japan’s largest business lobbying organization—the Japan Business Federation (Keidanren)—its President Yoshinobu Tsutsui unusually called for government intervention to prevent excessive yen depreciation. This corporate pressure further complicates the BOJ’s decision-making environment.

Historically, the ten-year average exchange rate of the yen against the dollar is about 123.20, but over the past two years, the rate has mostly hovered between 140 and 161.95. The current level near 159 is already a recent low, reflecting persistent yen depreciation pressure. This ongoing weakness not only threatens the inflation target but also puts pressure on the BOJ’s independence—balancing exchange rate risks and economic growth, the BOJ is being forced to reconsider the timing and magnitude of rate hikes in this “exchange rate versus policy” tug-of-war.