Stronger Japanese Yen Against US Dollar Raises Speculations
The Japanese yen surged against the US Dollar after sinking to its lowest level since 1990, with traders allegedly citing possible intervention by Japanese authorities. The US dollar went down to a low of 154.40 yen from as high as 160.245. According to some banking sources, Japanese banks sold dollars for yen, but analysts raise speculations of possible government intervention based on the history of Japan’s financial sectors.
During the past few weeks, traders have been waiting for signs of action from the Japanese government to intervene after the Japanese yen lost some 11% against the dollar, considered a 34-year low in trading, despite the Bank of Japan’s historic exit from negative interest rates last month.
The Japanese yen has swung wildly in trading against the US dollar after the Bank of Japan (BOJ) bought government bonds, speculating hopes to some traders that it could soon result in a slower decline in the yen’s value. The Japanese yen has been on a near-continual slide since early 2021 as the BOJ has maintained ultra-low interest rates, contrasting with relatively high US interest rates and other Central banks that hiked borrowing costs.
The low yield offered by Japanese government bonds compared to US Treasuries and other foreign sovereigns has resulted in a constant flow of Japanese money abroad, keeping the yen under pressure.
Japanese Government’s Alleged Intervention
Officials in Japan did not confirm an intervention by authorities, while Japan’s top currency diplomat, Masato Kanda, declined to comment when asked if authorities had intervened. Diplomat Masato Kanda is the Vice Minister of Finance for International Affairs in the Japanese Ministry of Finance.
Although the Japanese diplomat declined to comment on the reported government intervention, he said that the current developments in the currency market were “speculative, rapid and abnormal” and could not be overlooked.
Japan’s Ministry of Finance was not immediately available for comment. Still, according to Nicholas Chia, Asia macro strategist at Standard Chartered Bank in Singapore, if the movement of the Japanese yen represents intervention by the authorities, it “is unlikely to be a one-and-done move.”
The Japanese officials also assured that they were prepared to step in to prevent sharp movements in the exchange rate, although authorities refrained from intervening during the currency’s yearlong slide.
Based on Japan’s history of supporting the yen, in 1991-1192, the Bank of Japan intervened to support the yen by selling dollars. 1997-1998, during the Asian financial crisis, the BOJ also intervened to support the weak yen. In October-November 2011, the BOJ sold yen before a massive monetary expansion. Last October 2022, when the yen neared 152, Japan intervened, and the latest issue right now is the suspected intervention of the Japanese authorities after a 34-year low.
Effects of Yen’s Fluctuating Currency
A weaker Japanese yen has helped Japanese exporters boost profits and put more cash in the pockets of visitors and tourists. However, it has also put pressure on household budgets, with the possibility of raising the prices of imported goods. This is a headache for policymakers.
Higher import costs will add to the inflationary pressures of the government and squeeze ordinary Japanese household’s budgets.
Bank of Japan (BOJ) Government Kazuo Ueda said in a news conference that exchange-rate volatility would affect monetary policy only if there were a significant economic impact.
“If yen moves have an effect on the economy and prices, that is hard to ignore. It could be a reason to adjust policy,” Ueda said.
Japan’s International Commitment
Bloomberg reported that Japanese authorities tend to talk more about containing excessive moves in the Japanese yen’s price than in the dollar because Japan is committed to international agreements stipulating that markets should determine exchange rates.
The Group of Seven (G7) major economies to which Japan belongs have indicated that excessive and disorderly moves could harm their economies and financial stability. If there are sharp moves, they could step into their markets. The G7 comprises the world’s largest developed economies: France, Germany, Italy, Japan, the United States, the United Kingdom, and Canada.
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