Bank of Japan chief Kazuo Ueda said Tuesday after meeting with Prime Minister Fumio Kishida that the central bank will keep close tabs on the impact of the yen's recent sharp drop on inflation and its conduct of monetary policy.
Ueda reiterated that the weak yen has had no big impact on underlying inflation so far, but he expressed caution that currency moves could potentially affect the economy "to a great extent."
His comments came after he was perceived to have played down the significance of the yen's rapid depreciation last month, accelerating its fall against the U.S. dollar.
"While the situation surrounding prices and wages was a major point, we did talk about foreign exchange rates," Ueda told reporters at the prime minister's office.
"We will carefully watch how (the weak yen) will impact trend inflation," he said.
The meeting between Kishida and Ueda was the first since March, when the BOJ made a landmark shift from unorthodox monetary easing. The two confirmed the need for close coordination between the government and the central bank, according to the governor.
Alarmed by its blow to households and businesses, Japanese authorities are suspected to have intervened in the foreign exchange market and the country's top currency diplomat on Tuesday warned anew that the government would take "appropriate" action against excessive yen fluctuations.
While the yen's recent rapid fall against the dollar apparently prompted Japan to intervene in the market last week for the first time since 2022, analysts say the underlying trend of yen weakness will likely persist.
The BOJ raised interest rates in March for the first time in 17 years but they are still behind its global peers, including the U.S. Federal Reserve, which has aggressively tightened policy to curb inflation. The interest rate gap has made the yen less appealing, prompting intense selling of the currency.
Masato Kanda, vice finance minister for international affairs, said foreign exchange rates should be stable, reflecting economic fundamentals. But he remained silent on whether Japan had stepped into the market.
"We must take action against disorderly movements, led by speculators and others," Kanda told reporters. "We will respond appropriately to excessive fluctuations that deviate from fundamentals."
The yen rebounded sharply after falling beyond 160, a 34-year low versus the dollar, on April 29. The yen later retreated to the 157 range but again surged to the 151 level following another suspected intervention in New York on Wednesday.
After the series of suspected market interventions estimated by market sources to be worth over 8 trillion yen ($52 billion), the yen was mostly trading in the 154 territory on Tuesday in Tokyo.
Unlike in September 2022, when Japan announced its foray into the market immediately after taking action, it has not confirmed whether or not it intervened in the market this time around, in an apparent bid to leave traders cautious about making bold moves.
Asked about the difference in response, Kanda said the September 2022 announcement was an "exception," given that the government had carried out its first intervention in a quarter century.
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