Bank of Japan's yield curve control policy drives the depreciation of the yen

The Bank of Japan's yield curve control policy has had a devastating effect on the value of the Japanese yen, driving the currency to a 20-year low against the US dollar.

In its ongoing battle against free-market forces, the Bank of Japan has vowed to keep the money printing press running in order to support Japanese Government Bond (JGB) prices and maintain the 10-year JGB yield at a level not exceeding 0.25%. The relentless buying of JGB with freshly minted yen is one of the main causes of the precipitous fall of the currency.

Over the past 12 months, the JXY has fallen from 92.52 (21st April 2021) to 77.90 (21st April 2022). That's a whopping loss of more than 15% in the value of the yen when measured against a basket of other major currencies. This represents a very substantial loss in the purchasing power of the yen.

In a country that is well known for its large population of elderly citizens, one has to question the wisdom of such a policy, which serves to erode the purchasing power of the retirement nest eggs of approximately 29% of the population.

The governor of the Bank of Japan, Kuroda Haruhiko, would do well to heed the warning from Ray Dalio, in which he reminded the central banks that continued money printing would inevitably lead to a decline in the value of fiat money.

Persistent depreciation of the yen will no doubt continue to erode the purchasing power of the elderly population of Japan. As Kuroda enters the final year of his second term as governor of the Bank of Japan, there must be lingering concerns about his legacy, that he will be remembered as the man responsible for the drastic erosion of Japanese purchasing power rather than as the country's economic savior.