Japan Tries to Save the Yen

More unusual is why Mr. Ueda said he’s taking these steps: the yen. Japan’s currency has lost significant value in recent months, falling to about ¥162 per dollar in mid-July before a series of government interventions pulled it up to about ¥154. A major cause of this weakness is the yawning gap between interest rates in the U.S. and Japan.

Mr. Ueda on Wednesday referred to the weak yen as “an important risk” and cited it as “one of the reasons for the policy decision.” Officials and politicians are concerned that a weak yen is fueling import-price inflation that’s weighing on consumer spending.

From this perspective, Wednesday’s policy change worked as the yen soared to near ¥150. This rise may prove more durable than some recent episodes of modest strengthening because, unlike occasional government interventions to buy yen in the exchange market, Mr. Ueda has altered the relative interest rates that influence investors’ behavior.

This makes Mr. Ueda the only major-economy central banker to admit to being at all concerned about exchange rates. Washington in particular might note Tokyo’s unease about a weaker yen, after a recent U.S. Treasury report added Japan to a “monitoring list” for possible exchange manipulation. Since Donald Trump’s views of trade are trapped in the 1980s, or perhaps the 1920s, a second Trump Administration would pick up the theme.

Unfortunately for Mr. Ueda, the yen isn’t his only concern. One reason to move slowly in tapering Japan’s quantitative easing is that other buyers will have to be found for Japanese government bonds, of which the BOJ currently holds about half the outstanding issuance. Tokyo reportedly is lining up brokers to market more of the bonds to global investors.

One unknown is whether or how such capital inflows—coupled with a slowing or reversal of Japan’s famous outbound carry trade as domestic rates rise—will affect the yen or other financial markets such as the U.S. Another unknown is how a Japanese economy marked by zombie companies and other legacies of ultracheap money will adapt to slightly higher rates.

Mr. Ueda appears to hope he can manage urgent exchange-rate risks while moving slowly enough on policy normalization to avoid exacerbating these other problems. Japan continues to be the world’s biggest monetary experiment, and the most perilous.