Economists say Japan has many reasons to avoid direct intervention in the foreign exchange market to support the yen, especially as the Fed is expected to raise interest rates on Wednesday.
The chances of their intervention before the Fed make a decision are almost zero. When the United States is about to raise interest rates by 50 or 75 basis points, Japan is less likely to affect the yen trend. Unsuccessful intervention will leave the Japanese Treasury Department without other tools. For them, it is better to use it as a last resort."
Due to policy differentiation, the widening gap in U.S. and Japan's Treasury yields has hit the yen. The market speculates that the Japanese government may consider intervening in the market to support the yen. Zhitong Finance reported last week that the US dollar broke through the key psychological threshold of 130 yen against the yen. Prior to this, the Bank of Japan stepped up efforts to defend its loose monetary policy.
Although Japanese officials have stepped up warnings of further large fluctuations in the yen after the fall, even their tougher words suggest that market participants do not need to remain alert to the maximum intervention of the Japanese government.
is driving the yen down due to huge policy differences between the Bank of Japan and other central banks scrambling to raise interest rates to curb inflation. The yen has fallen more than 11% against the US dollar this year, the worst performing among the G10 currencies.
At present, Japanese Prime Minister Fumio Kishida and Bank of Japan Governor Haruhiko Kuroda seem to have adopted a division of labor in policy. The Japanese government last week provided $48 billion in bailout measures to consumers and businesses to help them cope with energy and food prices driven up by the weaker yen. Meanwhile, the Bank of Japan insists on supporting the economy through ultra-low interest rates.
Among the economists surveyed before the Bank of Japan held a meeting last week, 81% believed that the Bank of Japan was unlikely to intervene in exchange rate; 40% said the yen-USD exchange rate was still good for the overall economy at the 130 yen level, and 24% said it was not.
As policy differentiation between the Fed and the Bank of Japan is now more obvious than ever, analysts say intervention may just provide speculators with the opportunity to buy the dollar again.
Unlike the intervention to sell the yen (Japan can continue issuing bonds to provide funds when needed), the effort to support the currency by buying the yen is restricted by Japan's foreign exchange holdings. With daily trading volume exceeding US$6.6 trillion, the foreign exchange market is the world's largest financial market. Its size ultimately makes Japan unable to deal with it alone and has no hope of success.
When Japan's own monetary policy affects market trends, the barriers to seeking foreign aid also seem to be high. In its semi-annual report on exchange rate manipulation, the U.S. Treasury pointed out that disorderly fluctuations in the market must be very serious for reasons to be helped, and cited only three examples since 1996: the Asian financial crisis, the fluctuations after the introduction of the euro, and the fluctuations after the Japanese tsunami. "It is likely that Japan will find it difficult to get any support for intervention from overseas," said Harumi Taguchi, a global market intelligence economist at S&P. Japan's Treasury Secretary Shun Suzuki met with U.S. Treasury Secretary Yellen last month; he said the two sides discussed currency issues in talks on their respective economies. Shunichi Suzuki denied reports from Japanese media about their discussion of joint intervention. Speculation about Japanese government intervention may continue.
If the yen continues to decline, there may also be cracks in the consensus between the Bank of Japan and the Japanese government. As material costs and energy costs soar, Japanese businesses and households are increasingly dissatisfied with the negative impact of the weakening of the yen.
Kisha Fumio Kishida hopes to take the right position of voters before the national election in the next few months. Since the next Bank of Japan meeting will not be held until June, if the yen continues to fall, Kishida Fumio may have to look for more mitigation measures.
, Ruisuke Securities economist Shunsuke Kobayashi said: "As a general election will be held in the summer, the Japanese government may intervene to show that they are taking action. Unilateral intervention will only have limited impact and may ultimately be a sign that focuses on the election."
