Japan Unlikely to Intervene in Yen Downtrend, Says Former FX Diplomat
Japan’s Stance on Yen Downtrend
Japan is unlikely to intervene in the yen’s downtrend through exchange-rate manipulation, according to Naoyuki Shinohara, a former top currency diplomat. Shinohara believes that the recent declines in the yen reflect economic fundamentals, making intervention unnecessary. He explained that there is no set rule or shared agreement among G7 advanced nations on what constitutes “excess volatility” that would warrant intervention. Typically, excess volatility refers to short-term fluctuations rather than long-term trends lasting several months.
Contrasting Views within Japan
Shinohara’s perspective contrasts with that of the current top currency diplomat, Masato Kanda, who stated that prolonged yen depreciation might justify intervention. However, Shinohara, who maintains close ties with policymakers, argues that Japanese authorities understand the limitations of reversing market trends driven by economic fundamentals.
Currency Moves and Economic Fundamentals
G7 and G20 major economies share the understanding that currency movements should align with economic fundamentals, and excess volatility is undesirable. Japan has historically used this agreement to justify past interventions in the currency market. As investors anticipate prolonged yen depreciation due to higher U.S. interest rates and the Bank of Japan’s ultra-low interest rate policy, there is renewed pressure on Japan to address the situation.
Best Course of Action
If the weak yen continues to be a concern for Japan, Shinohara suggests that the Bank of Japan should normalize its ultra-loose monetary policy. He believes that the finance ministry should focus on responding to abrupt yen movements that deviate from the broader trend. In Japan, the finance ministry holds jurisdiction over currency policy and decides when and whether to intervene, while the Bank of Japan executes the order as the ministry’s agent.
Previous Interventions and Expertise
Tokyo last intervened in the currency market in September and October of the previous year when the yen eventually reached a 32-year low against the dollar. Shinohara, who served as Japan’s vice finance minister for international affairs until 2009, later became the deputy managing director of the International Monetary Fund until 2015.
Overall, Japan’s stance on yen depreciation remains cautious, with a preference for allowing market forces to determine exchange rates based on economic fundamentals.
