According to a report by Kyodo News on April 29, financial markets suspect that the sudden sharp rise in the yen's exchange rate against the dollar is the result of the latest intervention by the Japanese authorities, which is likely to unease foreign exchange traders and make them reconsider whether to sell the yen aggressively, at least for now.
While Japanese officials have not officially stated whether the government intervened after the yen fell below a new 34-year low of 160 on Monday, the fact that the exchange rate quickly returned to the 154 range reminded market participants that the Japanese authorities, which had previously only threatened to take action, were indeed able to respond if necessary, analysts noted.
Japan's top foreign exchange administrator, Mato Kanda, described the recent fluctuations in the yen as "excessive volatility" driven by speculators. But he declined to comment on the intervention, leaving it to the market to guess.
Masato Kanda, Vice Minister for International Affairs of the Ministry of Finance, said, "We are ready to respond at any time, regardless of whether we intervene or not, and we are open all year round." ”
Money market analysts say the impact of the intervention is seen as a "drop in the ocean" and will be short-lived, with little effect on fundamentally reversing the yen's weakness.
Not only is the yen significantly depreciating against the dollar, but it is also weak relative to other currencies. The yen has fallen to its lowest level against the euro since 1999.
Koji Fukaya, a researcher at a market risk consulting firm, said: "The timing of the intervention was right because it was a holiday and there was not much trading. The intervention of the Japanese authorities could send a warning that they will not allow the yen to fall freely and set a limit. ”
"The yen may not fall sharply, but don't expect a reversal of the yen's weakness," he said. The problem is that not only foreign investors and speculators, but also ordinary Japanese expect the yen to weaken. ”
A similar sentiment was expressed by a Japanese government official, who said that the current trend "will not be reversed anytime soon."
After the suspected intervention, the yen exchange rate returned to the level before the Bank of Japan's recent decision that monetary policy would remain unchanged.
Bank of Japan Governor Kazuo Ueda previously raised market expectations that the Bank of Japan will consider raising interest rates, that is, if the impact of the depreciation of the yen on inflation becomes too great to ignore. But on Friday, he said that the central bank had so far "not seen a big impact", clearly disappointing market participants.
As a result, speculators have joined the army of yen sellers, confident that the Bank of Japan will continue to maintain an accommodative stance.
In recent weeks, the Japanese authorities have issued a series of verbal warnings expressing concern about the rapid volatility of the yen. But the authorities have largely allowed the yen to break through key resistance levels such as 152 and 155, leading to growing speculation that the Japanese authorities are reluctant to intervene because they know it won't work.
Japan had previously intervened in the market when the dollar was close to 152 against the yen. The last intervention to buy yen and sell dollar was at the end of 2022.
Finance Minister Shunichi Suzuki said last week that he was more concerned about the negative impact of a weaker yen on the economy than about its benefits.
Fumio Kishida's government will prioritize measures to deal with the cost-of-living crisis exacerbated by the rapid depreciation of the currency.
Given that the excessive volatility of the exchange rate makes it difficult for companies to develop future business plans, business leaders have begun to express concern about the rapid decline of the yen.
According to the Bank of Japan's latest quarterly short-term economic observation survey, Japanese companies are expected to exchange rates of 141.42 yen per dollar and 151.86 yen per euro in fiscal 2024.
A weaker yen will boost the overseas profits of Japanese exporters in yen terms, but it will also increase the cost of imports for resource-poor Japan. Affected by the new crown epidemic, the Russia-Ukraine war and tensions in the Middle East, the global inflation problem has made the problem of import costs more and more obvious.
Koji Fukatani said: "A weakening yen is more dangerous and uncontrollable than a stronger yen. An important factor contributing to the weakening of the yen is that the government and the Bank of Japan have so far taken a wait-and-see approach, still implementing unconventional monetary easing. Changing this easing policy is a step towards reversing the yen's weakness. ”
According to a report on the Bloomberg News website on April 29, according to Robin Brooks, former chief currency strategist of Goldman Sachs Group, Japan's huge government debt is likely to make any efforts to prop up the yen come to naught.
According to the International Monetary Fund, Japan's debt has widened to more than 250 percent of its gross domestic product, a ratio higher than that of other comparable countries. He said this gives the Bank of Japan a strong incentive to keep interest rates low in order to control the government's financial costs.
As a result, unless policy is adjusted, this will negate any efforts to strengthen the yen. Japan's insistence on a policy of extremely low interest rates has led to a weakening of the yen.
Brooks, now a fellow at the Brookings Institution, said: "It's really about debt: it's too high. This would put Japan in a very difficult position and would have to keep interest rates low, thus passing on the fiscal woes to the yen. Even if you have a heavy debt burden, you can use a central bank to keep interest rates low. So Japan has been doing this, and Europe has been doing it, but there are consequences. ”
For Japan, the consequence is a sharp depreciation of the yen. Since March 2022, when the Fed began raising interest rates, the yen has fallen by more than 25% against the dollar. On Monday, there was speculation that the Japanese government intervened for the first time since 2022 to support the yen exchange rate. At that time, the yen hit a 34-year low against the dollar before rebounding.
However, there are doubts about the effectiveness of such measures, given the greater hedging pressure.
Although the Bank of Japan has allowed interest rates to be slightly above zero, the yield on 10-year Japanese government bonds is still only about 0.9%, compared to 4.6% on US Treasuries, giving investors a strong incentive to sell the yen and buy dollars.
The Bank of Japan is also continuing to buy government bonds through so-called quantitative easing. Brooks said the water release policy effectively neutralizes the effect of any attempt to prop up the yen.
"The Bank of Japan should allow the 10-year JGB yield to rise as a way to tighten policy, so that the Ministry of Finance's intervention will be more effective," he said. That's what's missing at the moment. (Compiler/Tu Ji)
An electronic screen in Tokyo, Japan, displays the real-time exchange rate of the US dollar against the yen on April 30. [AP]