November 26, 2022

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Japan is close to interfering with the yen

Japan is close to interfering with the yen

  • Japan says ‘concerned’ about sharp yen declines
  • Top currency diplomat says ‘all options are on the table’
  • Tokyo is ready to respond appropriately in accordance with G7 policy
  • Weak yen puts pressure on BOJ ahead of next week’s meeting
  • Analysts see low chances of BOJ intervention and policy adjustment

TOKYO (Reuters) – The government and the Bank of Japan said on Friday they were concerned about recent sharp declines in the yen in a rare joint statement, the strongest warning yet that Tokyo could intervene to prop up the currency as it plunges 20 years. its lowest levels for the year.

The statement underscores the growing concern among policy makers about the damage that a sharp depreciation of the yen could do to the fragile Japanese economy by hurting business and consumers.

But many market players are skeptical that G7 member Japan will soon step in to support the yen directly, a diplomatically fraught and potentially costly course of action that last occurred 20 years ago.

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After a meeting with his counterpart at the Bank of Japan (BOJ), chief currency diplomat Masato Kanda told reporters that Tokyo “will respond flexibly with all options on the table.”

He declined to say whether Tokyo could negotiate with other countries to jointly intervene in the market.

The G7, of which Japan is a member, has a longstanding policy that markets must set currency rates, but the group will coordinate closely on currency movements, and that excessive and uncontrolled exchange rate movements can harm growth.

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“We have seen sharp declines in the yen and we are concerned about recent moves in the currency market,” the Ministry of Finance, the Bank of Japan and the Financial Services Agency said in the joint statement issued after the CEOs’ meeting.

“We will communicate closely with the currency authorities in each country and respond appropriately as needed,” based on the G7 principles, the statement said.

Officials at the three institutions meet occasionally, usually to signal to the markets their concern about sharp market moves. But it is rare for them to issue a joint statement that includes explicit warnings about currency movements.

The yen briefly climbed to 133.37 yen per dollar after the statement, up 0.7% during the session, before settling at 133.67.

“Tokyo can intervene if the yen drops below 135 yen against the dollar and starts to crash. Then Tokyo really needs to intervene,” said Atsushi Takeda, chief economist at the Itochu Institute of Economic Research in Tokyo.

But Washington will not join, so it will be a unilateral intervention. For the United States, there is really no advantage in joining Tokyo when intervening.”

South Korean won, Chinese yuan and Japanese yen notes appear on $100 US dollar banknotes in this illustrative photo taken in Seoul, South Korea, December 15, 2015. REUTERS/Kim Hong Ji

Sharp declines in the yen have inflated the already soaring import costs of raw materials, raising the cost of living for households and putting pressure on the Bank of Japan to tackle rising inflation.

The Bank of Japan and the US Federal Reserve are scheduled to hold policy meetings next week.

With the Japanese economy still much weaker than its peers, the Bank of Japan is widely expected to maintain its ultra-easy policy next week. But it will face the dilemma of having to stick to the lower rates, although it may lead to further declines in the yen.

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“I don’t think today’s statement will have a direct impact on next week’s BoJ policy meeting,” said Hiroshi Ogai, chief Japan economist at JPMorgan Securities. “There are limits to what the Bank of Japan can do.”

The interference bar is high

Unlike other major central banks that have held off massive rate hikes to tackle inflation, the Bank of Japan has repeatedly committed to keeping interest rates low, making Japanese assets less attractive to investors.

This increasing policy divergence has caused the yen to fall 15% against the dollar since early March and close to 135.20 recorded on January 31, 2002. The last breakout would be its lowest level since October 1998.

Underscoring the public’s growing sensitivity to the rising cost of living, Bank of Japan Governor Haruhiko Kuroda was forced to apologize on Tuesday for remarking the day before that households were becoming more receptive to higher prices. Read more

“What could slow the pace of currency depreciation is a change in policy, but at the moment there seems to be no indication that the BoJ is concerned about inflation or the impact of a weak yen on that,” said Moh Seong Sim, a local investor. Currency Strategist at Bank of Singapore.

“It (the joint statement) is more of a verbal intervention and I am not sure if it will amount to any action and will not have any impact on the yen,” he said, adding the barrier of actual foreign exchange intervention. The markets are still very high.

Given the large economy’s reliance on exports, Japan has historically focused on halting sharp gains in the yen and taken a laissez-faire approach to the yen’s decline.

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The last time Japan intervened to prop up its currency was in 1998, when the Asian financial crisis triggered a sell-off of the Japanese yen and a rapid influx of capital from the region. Before that, Tokyo intervened to counter the depreciation of the yen in 1991-92.

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Additional reporting by Tetsushi Kajimoto and Lika Kihara; Additional reporting by Kantaro Kumiya and Daniel Lucink. Editing by Kim Coogle

Our criteria: Thomson Reuters Trust Principles.