The yen has been one of the worst performers against the dollar this year among major currencies, falling about 10%.
After several failed efforts by Japanese officials to talk the yen higher, the government appears to have moved more decisively both on April 29 and May 1 to prop up the currency.
The first likely interventions since 2022, Bloomberg estimates that policymakers have spent some ¥9tn last week — or nearly $60bn at current prices — to bolster the currency.
Japan’s new policy rate is by far the lowest in the developed world, at a range of between 0% and 0.1%. Federal Reserve officials have kept the US benchmark federal funds rate in a range of 5.25-5.5%.
That’s a major gap favouring investments in the US and therefore the dollar.
The gap is likely to stay intact longer than previously expected because the US economy’s performance has been stronger than anticipated, and inflation has proved sticky.
As a result, expectations for rate cuts by the Fed have been pushed back.
While the Fed delays rate cuts, Bank of Japan (BoJ) Governor Kazuo Ueda said he’s likely to raise interest rates again if the underlying price trend improves.
He also said Japan’s overall policy settings will remain accommodative, meaning he’s unlikely to raise rates fast or by a lot.
That means any yen rebound is likely to be limited.
Generally, a weaker yen helps large Japanese companies with global operations because it increases the value of repatriated overseas profits. A weak currency can also help tourism by boosting the buying power of incoming travellers.
Japan hosted a record number of tourists in March as the country saw an early start to the cherry blossom season.
On the downside, a soft yen makes imports of energy and food more expensive, hitting consumers. The nation’s largest umbrella group of unions announced the largest wage hikes in three decades for the current fiscal year.
The first suspected currency intervention likely took place on May 29, after the yen hit 160 against the dollar for the first time since 1990. A sharp rebound in the yen followed later in the day, driving speculation that Japan had stepped back into markets to support its currency.
The second suspected intervention took place two days later, at the end of the US trading day, following the conclusion of the Fed’s two-day meeting and in thin market liquidity.
The Ministry of Finance has refrained from confirming interventions, but Bloomberg’s analysis of BoJ accounts suggests interventions took place.
Looking ahead, investors and economists are split over whether the BoJ is finished with raising interest rates this year or will make another move. Ueda has said if inflation runs hotter than expected, another rate hike would be on the table.
US Treasury Secretary Janet Yellen acknowledged sharp moves in the value of the yen this week, even as she declined to say whether Japan had intervened to support the currency.
Japan’s foreign currency reserves were worth about $1.15tn at the end of March, climbing by $4.6bn from the previous month, according to the latest data from the country’s Ministry of Finance.
About $155bn was parked with the Bank for International Settlements and other foreign central banks, down slightly from $155.7bn at the end of February.
While intervention is a clear way to tell speculators you won’t allow the currency to go into free fall, it’s only going to be a temporary fix unless economic fundamentals driving the trend are also addressed.
In addition, foreign reserves are generally there to protect the economy in the event of a major financial shock or unexpected event, not to artificially prop up the currency.
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