Written by Satoshi Sugiyama and Laika Kihara
TOKYO (Reuters) – Japan may have to take action against any disorderly foreign exchange movements due to speculation, the Japanese government's top currency diplomat Masato Kanda said on Tuesday, strengthening Tokyo's readiness to intervene again to support the fragile yen.
In a sign of authorities' concern about the yen's recent decline, Bank of Japan Governor Kazuo Ueda said currency movements were among the topics he discussed in a meeting with Prime Minister Fumio Kishida on Tuesday.
Kanda, Japan's deputy finance minister for international affairs who also oversees the country's currency policy, said the government does not need to intervene if exchange rates move steadily to reflect fundamentals.
“However, when there are excessive volatility or disorderly movements due to speculation, the market does not work and the government may have to take appropriate action. We will continue to follow the same resolute approach as we have in the past,” Kanda said.
Ueda also said the central bank will guide monetary policy while closely monitoring how the yen's decline affects inflation, suggesting that currency movements may influence the pace and timing of future interest rate hikes.
“I mentioned that in general, currency movements can have a potentially significant impact on the economy and prices, so the Bank of Japan will scrutinize the yen's recent declines in policy guidance,” Ueda told reporters after his meeting with Prime Minister Kishida.
Although the weak yen is a boon for Japanese exporters, it has become a headache for policymakers because it increases import costs, adds to inflationary pressures and pressures households.
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Tokyo is suspected of intervening on at least two separate days last week to prop up the yen after it fell to its lowest levels in more than three decades.
Bank of Japan data suggests authorities spent more than 9 trillion yen ($58.4 billion) defending the currency, helping lift the yen from a 34-year low of 160.245 to the dollar to its highest level in almost a month at 151.86 over a week.
It is estimated that Tokyo spent about $60 billion during its recent market rounds to support the yen in September and October 2022.
The yen, which has fallen nearly 9% against the dollar this year, was recently trading around 154.50.
Yield pressure
Japanese companies traditionally prefer a weak yen due to the country's heavy reliance on exports. But they are now wondering whether a weak yen has become too good a thing.
“Be that as it may, a yen below 150 (against the US dollar) is too much,” Masakazu Tokura, head of powerful trade lobby Keidanren, said at a regular news conference on Tuesday. He added that if the authorities had intervened, the timing would have been “very good.”
The continued decline of the yen puts the Bank of Japan in a critical position. The currency was under pressure despite the Bank of Japan's historic decision to abandon negative interest rates in March, with US interest rates rising and Japanese interest rates remaining near zero.
This dynamic has led to a shift of cash from the yen into higher-yielding assets, with pressures intensifying in recent months as expectations of interest rate cuts by the Federal Reserve decline.
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Ueda hinted last month that the Bank of Japan may raise interest rates in several stages in the coming years, with a possible hike in the fall. But the hawkish signals were overshadowed by markets focusing on signals to sell the yen.
Raising interest rates too quickly could also hurt Japan's fragile economic recovery, a risk the governor has emphasized even as the Bank of Japan phases out its massive monetary support.
Many analysts expect the Bank of Japan to raise interest rates from current levels around zero at some point this year, although they are divided on how quickly borrowing costs could rise after that.
($1 = 154.1800 yen)
