As the yen continues to face downward pressure amidst expectations of slow interest rate hikes by the central bank, Japanese authorities are under renewed scrutiny to counter the sustained depreciation of their currency. Below, we delve into the mechanisms and considerations involved in yen-buying intervention:
Last Confirmed Yen-Buying Intervention:
Japan’s last intervention occurred in September 2022, marking its first foray into the market to bolster its currency since 1998. This move followed a decision by the Bank of Japan (BOJ) to maintain its ultra-loose monetary policy, which led to the yen dropping to as low as 145 per dollar. Subsequently, Japan intervened again in October after the yen plummeted to a 32-year low of 151.94.
Reasons for Intervention:
While the Ministry of Finance typically sells yen to prevent its appreciation and safeguard the export-reliant economy, the current weakness of the yen presents a different concern. Japanese firms have increasingly shifted production overseas, and the economy heavily relies on imports for various goods, including fuel, raw materials, and machinery parts.
Indications of Imminent Intervention:
Verbal warnings from Japanese authorities, signaling their readiness to take decisive action against speculative currency movements, often precede intervention. Additionally, the BOJ’s practice of rate checking, wherein officials solicit buying or selling rates for the yen from dealers, serves as a potential precursor to intervention.
Recent Developments:
Finance Minister Shunichi Suzuki’s statement on March 27 hinted at the possibility of decisive measures against yen weakness, reminiscent of the language used during the 2022 intervention. Subsequently, Japanese authorities convened an emergency meeting in response to the yen’s continued decline. Despite efforts to address the issue, including discussions with the United States and South Korea, the yen’s slide persisted, with the dollar reaching a 34-year high of 155.74 yen on Thursday.
Determining Intervention Thresholds:
Authorities assess the speed of yen depreciation and the role of speculators to gauge the need for intervention. While the dollar has breached the psychologically significant 155 level, the gradual nature of its ascent, driven primarily by U.S.-Japanese interest rate differentials, complicates the argument for intervention based on fundamentals.
Political and Economic Considerations:
The decision to intervene is politically charged, influenced by public sentiment and the potential impact on the cost of living. Prime Minister Fumio Kishida faces pressure to prevent further yen depreciation amid waning approval ratings ahead of a ruling party leadership race in September. However, intervention entails significant costs and may not yield desired results given the immense scale of the foreign exchange market.
Mechanics of Intervention:
Intervention involves the Ministry of Finance issuing short-term bills to raise yen, which are then sold to weaken the currency. Alternatively, authorities tap into Japan’s foreign reserves to acquire dollars for yen sales. The finance minister initiates intervention, with the BOJ executing the order on behalf of the ministry.
Challenges and International Cooperation:
Japanese authorities seek the support of Group of Seven (G7) partners, particularly the United States, for interventions involving the dollar. While recent discussions with U.S. officials may signal informal consent for intervention, U.S. Treasury Secretary Janet Yellen emphasized the need for interventions only in exceptional circumstances. Additionally, the looming U.S. presidential election adds complexity to Japan’s decision-making process.
Uncertainties and Future Outlook:
Despite intervention efforts, the prevailing weak-yen trend driven by expectations of prolonged low interest rates poses a formidable challenge. BOJ Governor Kazuo Ueda’s cautious approach underscores the delicate balance between addressing currency concerns and supporting Japan’s fragile economy.
In summary, Japanese intervention to bolster the yen involves a complex interplay of economic, political, and international factors, with no guarantee of reversing the currency’s downward trajectory amidst broader market dynamics.