As the yen continues its decline, Japanese authorities are facing increasing pressure to address the sustained depreciation of their currency. Traders are driving down the yen on the anticipation that any forthcoming interest rate hikes by the central bank will be gradual, prompting concerns among policymakers.
The yen experienced a rebound after Tokyo issued its strongest warning yet on the possibility of intervention, following a dip to a 34-year low of 151.97 against the dollar earlier in the day.
Here’s a breakdown of how yen-buying intervention operates:
Last Confirmed Yen-buying Intervention?
Japan intervened in September 2022 for the first time since 1998, buying yen after the Bank of Japan’s decision to maintain its ultra-loose monetary policy drove the yen down to 145 per dollar. Another intervention followed in October when the yen dropped to a 32-year low of 151.94.
Why Intervene?
While the Ministry of Finance typically sells yen to prevent its appreciation, recent yen weakness is raising concerns. With Japanese firms shifting production abroad and the economy heavily reliant on imports, a weak yen could have adverse effects on the economy.
Signals of Potential Intervention
Escalating verbal warnings from Japanese authorities, indicating they “stand ready to act decisively” against speculative moves, often precede intervention. Traders also keep an eye on rate checking by the Bank of Japan, which can signal intervention readiness.
Recent Developments
Finance Minister Shunichi Suzuki’s remarks on Wednesday hinted at possible intervention against yen weakness, marking a departure from previous statements. An emergency meeting was convened shortly after to address the issue, signaling concern over rapid currency fluctuations.
Determining Factors
Authorities assess the speed of yen depreciation and whether it’s driven by speculation to gauge intervention necessity. Market players view breaches above certain yen-dollar levels, such as 152 yen and 155 yen, as potential triggers for intervention.
Challenges and Considerations
Intervention decisions are influenced by public sentiment and political pressure. Rising public discontent over a weak yen can prompt action, as seen in 2022. However, intervention is not without risks, as it can be costly and ineffective in the long term.
Intervention Mechanism
When intervening to weaken the yen, the Ministry of Finance issues short-term bills to raise yen, which are then sold in the foreign exchange market. To support the yen, authorities tap into Japan’s foreign reserves to exchange for dollars.
Potential Roadblocks
Yen-buying intervention presents challenges, including the risk of depleting foreign reserves and the need for international support, particularly from Group of Seven partners like the United States.
The decision to intervene is complex and entails careful consideration of economic and diplomatic factors, reflecting the delicate balancing act facing Japanese policymakers.