Japanese Authorities Under Pressure to Address Depreciation in Yen
New Challenges for Japanese Authorities
Recent Developments and Pressure for Intervention
Japanese authorities are currently facing renewed pressure to address the persistent depreciation of the yen. Traders are driving down the currency based on their expectations that any future interest rate hikes by the central bank will be gradual.
The Last Confirmed Yen-Buying Intervention
In September 2022, Japan engaged in yen-buying intervention for the first time since 1998, following a Bank of Japan decision to maintain its ultra-loose monetary policies. The intervention was prompted by the yen’s drop to 145 per dollar, which was followed by another intervention in October when the yen hit a 32-year low of 151.94.
Reasons for Intervening
Yen-buying intervention is rare, typically done to prevent the yen’s rise from negatively impacting the export-reliant economy. However, the current weakness in the yen poses challenges as Japanese firms have shifted production overseas, making the economy heavily reliant on imports.
Indicators for Potential Intervention
Verbal warnings from Japanese authorities about being prepared to take action against speculative movements and rate checking by the Bank of Japan can serve as precursors to possible intervention.
Recent Responses and Market Concerns
Following Finance Minister Shunichi Suzuki’s warnings against yen weakness, an emergency meeting was held to discuss the issue. Despite efforts to stabilize the yen, its continued decline led to concerns raised by Japan and South Korea in a trilateral meeting with the United States.
Future Intervention Parameters
Authorities evaluate the speed of yen depreciation and the role of speculators in driving the movements to determine the necessity of intervention. While the dollar has surpassed the 155 level, gradual increases driven by U.S.-Japanese interest rate differentials may complicate intervention justification.
Political and Economic Considerations
Intervention decisions are politically influenced, especially when public discontent over a weak yen and rising living costs are heightened. Prime Minister Fumio Kishida faces challenges as intervention efforts are costly and may not effectively shift market dynamics.
Strategies for Intervention
During interventions to counter yen appreciation, the Ministry of Finance issues short-term bills to raise funds for selling yen, while tapping into foreign reserves for dollar exchange. Coordination with Group of Seven partners, particularly the U.S., is crucial for intervention success.
Challenges and Future Outlook
Efforts to stabilize the yen may face obstacles due to market dynamics driven by expectations of prolonged low interest rates in Japan. The decision on intervention may be further complicated by the upcoming U.S. presidential election and the delicate balance in global currency markets.
