Last week, the Bank of Japan held a policy meeting and decided to hold off on raising the policy interest rate.

At the start of the year, an interest rate hike in April was widely viewed as a foregone conclusion, but the decision was made to assess the uncertainty following the risk-off sentiment and surge in oil prices triggered by the attack on Iran carried out by Israeli Prime Minister Netanyahu and U.S. President Trump at the end of February.

However, at this policy meeting, three board members (Nakagawa, Takada, and Tamura) opposed the decision to hold off on the rate hike,
arguing for an additional increase. The market interpreted this as a hawkish stance,
and the yen strengthened in response following the announcement of the meeting’s results.
However, after the U.S. FOMC also decided to hold off on a rate hike the following day, the yen was sold off again, breaking through the 160-yen-per-dollar threshold.

Japan’s Ministry of Finance had long been repeating statements suggesting intervention in the foreign exchange market on the grounds that “speculative movements are evident” whenever the rate approached 160 yen per dollar. At 5:00 PM on Thursday, Finance Minister Katayama told reporters,
“The time to take resolute measures is approaching,” signaling the possibility of currency intervention and thereby deterring the market.

Subsequently, Finance Vice Minister Mimura also spoke to reporters, stating that “highly speculative activity is intensifying” and calling this “a final warning.”

In response to these remarks, the dollar-yen exchange rate began to plummet. Starting at 7:30 p.m., due to what appeared to be one-sided and intermittent sell orders—likely resulting from currency intervention—
the rate fell by more than 5 yen, from 160.70 yen to 155.52 yen. This represented a 3.2% decline.

Although both Finance Minister Katayama and Finance Vice Minister Mimura have consistently declined to comment on the 5-yen fluctuation that occurred over the course of just over five hours,
the Nikkei reported, citing government sources, that “currency intervention was carried out,” making it an open secret that intervention had effectively taken place.

Regarding this intervention, since the Bank of Japan’s May 1 forecast for current account balances showed a discrepancy of approximately 5 trillion yen between the item reflecting intervention and prior market estimates,
it is speculated that the scale of the intervention was around 5 trillion yen.

Now, regarding the Bank of Japan’s policy interest rates over the past few years, although it lifted the zero interest rate policy in 2023, it has consistently maintained a cautious stance on rate hikes,
at times postponing rate increases as if influenced by the government’s intentions.

However, amid these low interest rates, the Japanese yen has been sold off, causing import prices to rise. To maintain prices for general consumer goods—particularly food items, where consumers are sensitive to price increases—
stealth price hikes—reducing product quantities to maintain prices—have also emerged.
As a result, food prices have effectively doubled over the past five years, creating a reality that starkly contrasts with the Bank of Japan’s assessment that “core inflation has not reached the 2% target,”
and public dissatisfaction is mounting.

Under these circumstances, I have serious doubts as to whether it is a sound policy to spend 5 trillion yen on currency intervention as the cost of postponing interest rate hikes—a move that effectively allows the yen to weaken.

The figure of 5 trillion yen is an estimate based on the intervention on April 30. On the following day, May 1, in the evening, the yen plummeted by 1.80 yen from 157.30 to 155.47,
and again today at 12:45, it plunged from 157.20 to 155.68.

Both the May 1 and today’s sharp drops involved significant fluctuations over an extremely short period of just over 10 minutes; such movements typically do not occur without intervention.

We must wait for the Bank of Japan’s foreign exchange intervention report, to be released on May 29, for precise details; however, if 5 to 6 trillion yen were spent on currency intervention,
this would amount to approximately 1% of Japan’s 600 trillion yen GDP. I believe we should question whether it is truly appropriate for the Japanese government to spend such a massive sum in just a few hours.

Specifically, even if a 0.25% interest rate hike were implemented in light of the current situation in Iran, it is unlikely that such a policy rate increase would cause GDP to fall by as much as 1%.
Rather, given that it would have the effect of stimulating the economy by putting the brakes on rising import prices, I must say that the policy package consisting of the decision to postpone this rate hike and the symptomatic treatment of currency intervention
can only be described as a foolish policy.

Unfortunately, within Japan, the media reports only on the short-sighted issues of whether the Bank of Japan will raise interest rates and whether the Ministry of Finance will intervene in the foreign exchange market.
The reality is that there are no members of the Diet, journalists, or scholars pointing out the merits or demerits of this policy package, and that is precisely why the Japanese yen continues to be sold off.