Asian Currency

BoJ reportedly intervenes in the Yes as US dollar surges, other central bankers in Asia on edge

The prospect of continued strong US economic activity and high US interest rates has triggered massive capital inflows into the United States in the past few months, as investors anticipate that US assets will generate stronger returns than those available elsewhere.

But that’s creating major problems for other central banks, particularly those in Asia.

Although the BoJ is finally moving back from its long adherence to ultra-loose monetary policy – it became the last central bank to abandon negative interest rates in March – it is doing so at a snail’s pace.

Read more: Bank of Japan scraps negative rates in historic policy shift

Last week, the BoJ kept its key rate steady in the range of zero to 0.1 per cent. Although a weaker yen could potentially boost Japanese economic activity by making exports cheaper in global markets, the Japanese central bank is clearly worried that too sharp a decline in the currency will result in financial instability, as investors and consumers lose confidence in the Japanese economy and shift more of their money abroad.

And the yen’s weakness is clearly weighing on Japanese stocks. The Nikkei 225 index has fallen 7 per cent from the record high it reached last month.

The BoJ isn’t the only Asian central bank grappling with the stronger greenback. Others are worried that the stronger greenback will push up the price of globally traded commodities such as oil, which are typically priced in US dollars, and will push up the interest costs on their US-dollar debt.

Indonesia, China on alert

The Indonesian central bank, Bank Indonesia, caught investors by surprise last week when it raised its benchmark interest rate by 25 basis points to a record high of 6.25 per cent in an effort to support the currency.

Bank Indonesia governor Perry Warjiyo explained that global uncertainty had flared up, with the US dollar’s resurgence and conflict in the Middle East, and that this warranted an “anticipatory, forward-looking and pre-emptive policy response”.

Although inflation has been within the Indonesian central bank’s target range of 1.5 per cent to 3.5 per cent this year, there is a risk that a weakening rupiah will fan inflation by pushing up the price of imported food and fuel.

Indonesia is also feeling the chill effects of capital outflows, with foreign investors selling close to $US600 million ($914 million) in Indonesian government bonds this month.

Meanwhile, the Philippines and Thailand are delaying interest rate cuts to avoid destabilising their currencies, and the head of Korea’s central bank Rhee Chang-yong has described the won’s weakness – the Korean currency is the weakest it has been since 2022 – as “excessive”.

Rhee argued the US dollar’s strength and geopolitical tensions in the Middle
East were contributing to the won’s decline, as was weakness in other Asian currencies such as the Japanese yen and the Chinese yuan.

The Chinese yuan has been weakening as the world’s second-largest economy continues to struggle with a property market collapse which has sapped consumer spending. This has prompted Chinese firms to hoard US dollars in the anticipation that the yuan will continue to slide, which is further weighing on the currency.

The Chinese yuan has fallen from around 6.7 per US dollar at the start of 2023 to 7.2 at present, prompting fears that China could trigger a global currency war by using a weaker currency to bolster its exports of high-end manufactured goods.

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