© Reuters. FILE PHOTO: Examples of Japanese yen banknotes are displayed at a National Printing Bureau factory that produces Bank of Japan notes at an informational event about a new series of banknotes scheduled to be introduced in 2024, in Tokyo, Japan, November 21, 2022.
by Leika Kihara
TOKYO (Reuters) – Japanese authorities are facing renewed pressure to combat fresh declines in the yen, fueled by market expectations that the Bank of Japan will keep interest rates ultra-low, even as other central banks tighten monetary policy to curb inflation.
Here are potential steps the government and central bank could take to address further yen weakness, which is boosting exports but hurting households and retailers by inflating already rising import costs for fuel and food.
Escalation of Verbal Interference – High
Japanese authorities have begun to turn the markets around this week, describing the recent yen declines as “sharp and one-sided”. He wouldn’t rule out any options, said Masato Kanda, the chief currency diplomat, when asked if intervention might become a possibility.
If the yen’s decline accelerates, the authorities may step up their warnings to pledge “decisive action” against speculative moves.
Such remarks, which were aired before Japan’s earlier intervention in buying the yen last year, would indicate that Tokyo is getting closer to direct intervention in the currency market.
An intervention to buy the yen – most likely
Tokyo made rare forays into the currency market to support the yen in September and October last year to halt the currency’s slide, which eventually reached a 32-year low of 151.94 per dollar.
While the yen is still far from that low, many market players view the 145 as a Tokyo line in the sand which, if breached, could lead to another round of intervention. USD/JPY stood near 143.60 in Asia on Tuesday.
The authorities said that the speed of the yen’s movements, not the levels, is the key to deciding whether or not to enter the market. This means that the opportunity to intervene will rise if the yen’s declines are rapid and are seen to be driven mostly by speculative trading.
But the yen-buying intervention would be costly as the authorities would have to tap into Japan’s foreign reserves in order to sell dollars.
Tokyo will also need the agreement of other major economies, particularly the United States, to ensure the scale of intervention is sufficient to turn the tide.
The Bank of Japan raises interest rates – improbably
The Bank of Japan (BOJ) has pledged to keep interest rates ultra-low to support the economy, even as inflation has exceeded its 2% target for more than a year.
The pessimistic attitude is partly driving the yen’s decline, as markets focus on the divergence between Japan and the US and European central banks, which have aggressively hiked interest rates.
Some market players expect the Bank of Japan to allow interest rate hikes, such as raising an implied 0.5% cap on the target 10-year bond yield, as early as July.
But BoJ policymakers are wary of taking such steps too soon, given uncertainty about whether wages will continue to rise, and the risk of a deeper global recession hitting Japan’s fragile export-dependent recovery.
Nor does the BoJ have any intention of using monetary policy tools to curb the yen’s decline directly – a move that could be construed as currency manipulation and would be beyond its purview.
This means that the Bank of Japan will consider adjusting yield control policy only if inflation has risen for longer than expected, urging companies to raise wages and prices on a sustainable basis.