Masato Kanda, Japan's top currency diplomat, said that given the expectations of an interest rate hike by the Central Bank, it is necessary to closely monitor how policy decisions affect markets.
He added that the timing and pace of the Fed's monetary policy easing, as well as the prospects for the Bank of Japan's policy, can be used as an excuse for speculative trading. Kanda oversaw a currency intervention to buy the yen in 2022, aimed at curbing a sharp decline in the national currency.
Following the results of its January meeting, the Bank of Japan left the policy parameters unchanged, but signaled that it may soon abandon negative rates. Many market participants expect the Central Bank to raise interest rates at its April meeting.
"The Bank of Japan's ultra-loose monetary policy has contributed to Japan's recovery from deflation and economic recovery. On the other hand, its prolonged continuation has led to negative side effects," Kanda said, adding that it is desirable that exchange rates move steadily, reflecting fundamental economic indicators.
Regarding global economic risks, Kanda said China is likely experiencing increasing deflationary pressures and a stagnating real estate market, potentially hurting economies heavily dependent on exports to China. The US economy, on the other hand, was stronger than expected, increasing the chances of a soft landing, Kanda said, adding that the strength of the US economy underpins the recovery of the global economy, including Japan's.