El-Erian Raises Alarm On Yen's Exchange Rate: Delayed Exit From Yield Curve Control Heightens Risk Of 'Adverse Cross-Border Spillovers'

Noted economist Mohamed A. El-Erian highlighted concerns regarding the Yen’s exchange rate against the dollar, emphasizing the potential implications for the Bank of Japan’s monetary policy.

What Happened: El-Erian, in his tweet, pointed out that the Yen’s exchange rate against the dollar has returned to levels that historically prompted foreign exchange intervention.

He stated, “The Yen's exchange rate against the dollar is back at levels that have prompted fx intervention in the past. The recent depreciation also puts additional pressure on the Bank of Japan to accelerate what has been a very gradual exit from its YCC (Yield Curve Control) policy regime. The more the BoJ delays this exit, the greater the range of possible complications, and the higher the risk of adverse cross-border spillovers.”

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Why It Matters: The Yen’s depreciation against the dollar has been a topic of concern, especially as it nears levels that previously triggered government intervention.

This trend is largely attributed to the significant interest rate gap between Japan and the United States, prompting traders to sell yen and purchase dollars. The Bank of Japan (BOJ) has been maintaining its monetary easing, targeting a 2% inflation rate, while the U.S. Federal Reserve, under Chair Jerome Powell, has been proactive in raising interest rates to combat inflation.

The recent remarks by Powell at the Jackson Hole Economic Policy Symposium further underscore the Fed’s commitment to price stability.

El-Erian’s observations come at a time when the global economy is grappling with inflationary pressures and central banks worldwide are recalibrating their monetary policies.

The Yen’s performance and the potential for intervention by the Japanese government will be closely watched by investors and policymakers alike, especially given the broader implications for global financial markets and the economic dynamics in Asia.

Photo via Shutterstock.

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