As Yen Rise Rattles Some, Watch This Measure for BOJ Discomfort

(Bloomberg) -- The yen’s appreciation in recent weeks has already triggered some initial commentary from Japan’s Ministry of Finance, and rattled the stock market on Tuesday. The key observer to watch, however, has been relatively quiet so far -- the Bank of Japan governor.

Haruhiko Kuroda, whom local media report is in line for an historic reappointment as BOJ chief, is a particularly seasoned observer, having run currency policy at the Finance Ministry for more than three years around the turn of the century. And, with somewhat controversial comments at the time, he essentially pegged the low point for the yen in 2015. 

The measure Kuroda drew attention to at the time was the exchange rate adjusted for inflation and weighted against the currencies of Japan’s trading partners. He said that there was no real case for further depreciation.

Read here what Kuroda said in 2015, and the impact it had.

Right now, the so-called real effective exchange rate doesn’t look as strong as the yen looks just against the dollar, suggesting the currency may not yet be a big worry for the governor. While the gauge in the chart above only goes through January, the BOJ’s nominal trade-weighted yen, along with inflation forecasts, indicate February won’t be a game changer. Policy makers have also used the pre-Lehman shock level for the yen as a reference point, and it’s significantly weaker than back then, using Kuroda’s 2015 metric.

Where this all matters is its impact on monetary policy, as some BOJ watchers speculate some fine tuning in the mega-stimulus stance may come as soon as this year.

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