TOKYO (Reuters) – Japan is suspected of intervening in the foreign exchange market to support the yen on several occasions this month, highlighting its unease over the pain the currency’s slide is inflicting on households as import costs rise.
While authorities have not confirmed whether they have actually intervened, here’s what Tokyo’s intervention tactics are and what the move could mean for Japanese monetary policy:
Why did you intervene?
The yen had been at a 38-year low of more than 160 per dollar before the suspected intervention, leaving policymakers increasingly concerned that higher import costs could hurt weak private consumption.
The weaker yen has already begun to hurt Prime Minister Fumio Kishida’s popularity ahead of a ruling party leadership race expected in September.
Leaving the yen’s slide unchecked would have given markets the impression that Tokyo would turn a blind eye to speculative moves that were out of line with fundamentals.
What’s different this time?
In contrast to previous episodes of intervention, which typically came in the midst of sharp declines in the yen’s value, the suspected intervention on July 11 came when the dollar was already sliding in response to weak U.S. inflation data.
This suggests that Tokyo tried to seize the opportunity when the market tide was already moving in favor of the yen. The high probability of a U.S. interest rate cut in the near term would allow Japan to argue that further declines in the yen’s value against the dollar do not reflect fundamentals, justifying intervention.
Some analysts say the change in tactics may have been aimed at keeping markets guessing about when authorities might step in again. Top currency diplomat Masato Kanda said there was no specific time frame in which to judge whether the yen’s moves were excessive.
A media report that Japan has conducted interest rate checks against the euro/yen has also raised market concerns, as Tokyo rarely intervenes against the single European currency.
Where is the line in the sand?
Authorities say they have no specific levels in mind. But traders estimate that 160 yen per dollar is the threshold that Japan cannot cross, raising the possibility of intervention.
For example, Tokyo spent 9.8 trillion yen ($62.7 billion) intervening in the foreign exchange market in late April and early May, after the Japanese currency hit a 34-year low of 160.245 to the dollar on April 29.
The yen has since fallen to a 38-year low of 161.96 per dollar on July 3, before last week’s suspected round of intervention pushed it below the 160 line.
What could lead to further intervention?
Rising import costs caused by a weaker yen threaten to undermine the administration’s efforts to turn inflation-adjusted wage growth into positive growth and give households more purchasing power.
If public anger over the inflationary impact of a weak yen escalates, it could increase political pressure on authorities to intervene again to halt the currency’s decline.
Will tactics change under new leadership?
Senior currency diplomat Masato Kanda, who led massive yen-buying interventions in 2022 and 2024, is known to be sternly warning markets against pushing the yen lower.
Kanda’s term is set to end in July, and he will be succeeded by Atsushi Mimura, a veteran of financial regulation whose views on currency policy are little known.
Japan’s exchange rate policy is likely to remain largely unchanged under a new currency chief. But the style of communication may differ, with some diplomats tending to offer more explicit warnings to markets than others.
How could the recent intervention affect the Bank of Japan’s policy?
Markets were divided on how Tokyo’s latest foray into the market will affect the Bank of Japan’s decision on whether to raise interest rates at its monetary policy meeting on July 30-31.
The Bank of Japan may feel pressure to cooperate with government efforts to slow the yen’s decline by deploying a hawkish twin surprise of quantitative tightening and interest rate hikes.
But doing so could give markets the impression that the yen’s movements are the main driver of its interest rate decision, something the Bank of Japan wants to avoid, as it runs counter to the central bank’s protocol of not using monetary policy as a tool for direct control over currency movements.
Analysts say that if the latest round of intervention succeeds in reversing the yen’s weakness in the market, it could give the Bank of Japan more flexibility in determining the timing of its next interest rate hike.
In Japan, the Ministry of Finance decides whether to intervene in the currency market, and the central bank acts as its agent.
(1 dollar = 156.4200 yen)
(1 dollar = 156.3200 yen)