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Another Black Wednesday?
Japan’s Monetary Policy and Yen Exchange Rate
Date:10.24.2022 Author:WANG Qushi, YANG Yuemin, ZHU Xiuye

Abstract: For many years, Japan has gradually ratcheted up its highly accommodative monetary policy, until yield curve control with unlimited purchase of Japanese Government Bonds. The yen exchange rate regime has gradually evolved toward a clean float, the real effective exchange rate of the Japanese yen was on a generally declining course in the past 30 years. Japan could sustain such a policy combination in a global low inflation and low-interest rates environment. Currently, the global economy may have entered a period of high inflation and high-interest rates. Just like high inflation and interest rate hikes by Bundesbank triggered “black Wednesday" in the UK, Japan's monetary policy and yen exchange rate are facing tensions in the new environment. If either high inflation or high-interest rates start to transmit into Japan's domestic economy, the current policy framework would face severe strains. Disorderly adjustments of the yen and JGB market could not be ruled out, with significant negative spillovers. Therefore, preparations should be made for such an eventuality.

Keywords: monetary policy, exchange rate, yield curve control