Japan’s New Interpretation of “Excessive” Yen Volatility: What Does It Mean?
Experts suggest that Japan’s recent redefinition of “excessive” yen volatility is not meant to lower the threshold for intervention, but rather to keep investors on alert. They believe that yen bears will continue to dominate until domestic monetary conditions tighten.
Traditional Definition of Excessive Volatility
Traditionally, Japanese authorities have defined excessive currency movements as sudden spikes or plunges in the yen that occur within a short period, often driven by speculative traders.
A Wider Scope for Intervention
However, currency diplomat Masato Kanda recently stated that prolonged, steady falls in the yen could also justify market intervention. This suggests that Tokyo is giving itself greater flexibility to support the currency.
“Excessive Volatility” Revisited
Kanda explained that even if currency movements do not occur within a single day or week, if one-sided moves accumulate over time and result in significant fluctuations, it could still be considered as excess volatility.
Current Yen Performance
Based on this revised definition, analysts argue that the yen’s 12% decline this year could be deemed “excessive”.
Verbal Tactics to Keep Markets on Edge
Although there is uncertainty regarding how long authorities can prevent the yen from plummeting further, Tokyo’s recent statements may slow down the pace of depreciation, at least for now.
Former currency diplomat Hiroshi Watanabe believes that intervention is not an effective tool to halt gradual yen declines. He points out that intervention only works when private funds follow the same direction, which is not currently the case.
Yield Payoff and Interest Rate Differential
The yen has been under selling pressure due to the Bank of Japan’s commitment to maintaining ultra-low interest rates, in contrast to other major economies tightening their monetary policies. The interest rate differential between the United States and Japan significantly influences the USD/JPY exchange rate.
Looking ahead, rising U.S. Treasury yields and the widening gap between U.S. and Japanese 10-year yields may continue to put upward pressure on the dollar, potentially leading to further yen weakness.
Conclusion
While Japan’s new interpretation of “excessive” yen volatility may create some uncertainty in the market, it is important to note that intervention alone may not be sufficient to reverse the yen’s decline. Monetary policy adjustments and changes in interest rate differentials will likely play a more significant role in determining the future direction of the yen.
