Pressure Mounts on Japanese Authorities to Address Yen Depreciation
Japanese Authorities Under Pressure
Japanese authorities are facing renewed pressure to combat a sustained depreciation in the yen. Traders are driving down the currency on expectations that any further interest rate hikes by the central bank will be slow in forthcoming.
Details on Yen-Buying Intervention
Japan bought yen in September 2022, its first intervention since 1998, after the Bank of Japan (BOJ) decision to maintain its ultra-loose monetary policy. The intervention was aimed at boosting the currency after it plunged to 145 per dollar. Subsequent interventions followed in October when the yen hit a 32-year low of 151.94.
Reasons for Intervention
Yen-buying intervention is rare, with the Ministry of Finance typically selling yen to prevent its rise from hurting the export-reliant economy. However, yen weakness is now seen as problematic due to Japanese firms shifting production overseas and heavy reliance on imports.
Signs of Intervention
Verbal warnings escalating to indicate decisive action against speculative moves signal possible intervention. Rate checking by the BOJ is also seen as a precursor to intervention by traders.
Recent Developments
Finance Minister Shunichi Suzuki hinted at decisive steps against yen weakness, prompting an emergency meeting to address the issue. Japan’s top currency diplomat expressed concerns over rapid yen depreciation and hinted at possible intervention to stabilize the currency.
Currency Stability
Authorities monitor the speed of yen falls to determine intervention necessity, focusing on speculative-driven moves. Former currency diplomats suggest intervention may occur if the yen breaks out of a long-standing range and falls significantly.
Political Considerations
Public sentiment and the potential impact on the cost of living influence intervention decisions. Public and media backlash may prompt intervention, although the effectiveness and cost of such measures are uncertain.
Intervention Mechanism
Intervention involves issuing short-term bills to raise yen for sale to weaken the currency. To support the yen, authorities tap into foreign reserves for dollar exchange. The finance minister orders intervention, executed by the BOJ.
Challenges and Uncertainties
Seeking support from Group of Seven partners, especially the United States, is crucial for intervention success. The upcoming U.S. presidential election may deter Japanese intervention, given potential political repercussions and uncertain outcomes in stabilizing the yen.
