Financial Stability and Monetary Policy Autonomy in Japan. Should Japan Peg the Yen to the Dollar?

Gunther Schnabl and Schürmann Christof ()
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Schürmann Christof: Flossbach von Storch Research Institute, Cologne, Germany

The Economists' Voice, 2025, vol. 22, issue 1, 25-46

Abstract: Given rising inflation the Bank of Japan has come under pressure to tighten monetary policy. The paper examines the risks of an interest rate hike for the sustainability of Japanese government debt, the Bank of Japan and the Japanese financial sector and derives possible repercussions for national and international financial stability. It finds significant valuation and currency risks in the private financial sector that limit the Bank of Japan’s room for manoeuvre. Pegging the yen to the dollar would eliminate appreciation expectations and reduce inflation risk. The loss of freedom in monetary policy making would be small.

Keywords: Japan; monetary policy; currency risk; valuation risk; financial stability; exchange rate stabilization (search for similar items in EconPapers)
JEL-codes: E31 E52 F31 (search for similar items in EconPapers)
Date: 2025
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DOI: 10.1515/ev-2024-0078

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