Japan edges closer to yen intervention after rare joint statement by government and central bank
TOKYO — Japan’s government and central bank said on Friday they were concerned about the yen’s recent sharp falls in a rare joint statement, the strongest warning yet that Tokyo could step in to support the currency as that it has been collapsing for 20 years.
The statement underscores growing concern among policymakers about the damage that a sharp depreciation of the yen could inflict on Japan’s fragile economy by hurting business activity and consumers.
But many market participants doubt Japan, a member of the Group of Seven (G-7), will soon step in to directly support the yen, a diplomatically cumbersome and potentially costly move that took place 20 years ago.
After a meeting with his Bank of Japan (BOJ) counterpart, top monetary diplomat Masato Kanda told reporters that Tokyo “will respond flexibly with all options on the table.”
He declined to say whether Tokyo could negotiate with other countries to jointly enter the market.
The G-7 has a long-standing policy that markets should determine exchange rates, but that the group will closely coordinate currency movements, and that excessive and disorderly exchange rate movements could harm growth.
“We have seen a sharp decline in the yen and are concerned about recent movements in the foreign exchange market,” the MoF, BOJ and Financial Services Agency said in the joint statement issued after their leaders’ meeting. .
“We will communicate closely with each country’s monetary authorities and respond appropriately if necessary,” based on G-7 principles, the statement said.
The heads of the three institutions meet occasionally, usually to signal to the markets their concern about sudden market movements. But rarely do they issue a joint statement with explicit warnings about currency movements.
The statement came hours before the release of the US Treasury Department’s semi-annual report on currency manipulation, which kept Japan on a list of 12 countries whose foreign exchange practices deserve “special attention”. She took note of recent yen weakness, which she attributed in large part to interest rate differentials due to the BOJ’s continued accommodative policy.
The yen briefly rallied to 133.37 yen to the dollar after Tokyo’s statement, but retraced most of it after a stronger-than-expected US inflation reading signaled more aggressive rate hikes coming from the Federal Reserve, which should further widen the suspended rate differentials. on the yen. It was the last at 134.15.
“Tokyo could step in if the yen slips below 135 to the dollar and starts to plummet. That’s when Tokyo really needs to step in,” said Atsushi Takeda, chief economist at the Institute. Itochu Economic Research Center in Tokyo.
“But Washington will not join so it will be a solo intervention. For the United States, there is really no merit in joining Tokyo for an intervention.
Sharp declines in the yen have inflated already rising commodity import costs, raising the cost of living for households and putting pressure on the BOJ to deal with creeping inflation.
Both the BOJ and the US Federal Reserve are due to hold policy meetings next week.
With the Japanese economy still much weaker than its peers, the BOJ is expected to maintain its ultra-accommodative policy next week. But it will face the dilemma of having to stick to low rates, even if that could fuel further declines in the yen.
“I don’t think today’s statement would have a direct impact on the BOJ’s policy meeting next week,” said Hiroshi Ugai, chief economist for Japan at JPMorgan Securities. “There are limits to what the BOJ can do.”
The bar for intervention is high
Unlike other major central banks that signal aggressive interest rate hikes to fight inflation, the BOJ has repeatedly pledged to keep rates low, making Japanese assets less attractive to investors.
This growing policy divergence has sent the yen down 15% against the dollar since early March and to a striking distance of 135.20 on January 31, 2002. A breakout that would be its lowest since October 1998.
Underlining the public’s growing sensitivity to the rising cost of living, BOJ Governor Haruhiko Kuroda was forced to apologize on Tuesday for a remark made a day earlier that households were increasingly accepting price increases.
“What can potentially slow the pace of depreciation is a change in policy, but at the moment there seems to be no indication that the Bank of Japan is concerned about inflation or the impact of the yen weakness on that,” said Moh Siong Sim, a currency strategist at the Bank of Singapore.
“It (the joint statement) is more of a verbal intervention and I don’t know if it will amount to an action and have no impact on the yen,” he said, adding the bar for actual intervention on the Change market. markets remains very high.
Given the economy’s heavy reliance on exports, Japan has historically focused on halting strong yen rises and has taken a hands-off approach to yen declines.
The last time Japan stepped in to support its currency was in 1998, when the Asian financial crisis triggered a massive sell-off in yen and a rapid outflow of capital from the region. Before that, Tokyo intervened to counter the fall of the yen in 1991-1992. Its last intervention of any kind was in 2011, but it was to weaken the yen.
The US Treasury report, which made no reference to Friday’s statement from Tokyo, credited Japan for being transparent about its foreign exchange trading, but cautioned that interventions should be rare events with sufficient notice.
“The firm expectation of the Treasury is that in large, freely traded foreign exchange markets, intervention should be reserved only in very exceptional circumstances with appropriate prior consultation,” the report said.
By Tetsushi Kajimoto and Leika Kihara