Japan’s intervention is unlikely to stem the fall of the yen

The weakness of Japan’s currency intervention is likely to prove ineffective in reversing the yen’s underlying against the US dollar, even though its first attempt in 24 years on the foreign exchange market to strengthen its currency had immediate effect.

The dollar briefly plunged below 141 yen from a 24-year high near 146 yen on Thursday after the government entered the market to stem the yen’s fall. The action took the market somewhat by surprise, although Finance Minister Shunichi Suzuki’s repeated warnings against the yen’s recent rapid drop to 24-year lows against the U.S. currency had left the market nervous, Masahiro Yamaguchi said. , head of investment research at SMBC Trust Bank.

An immediate sharp rise in the dollar seems difficult amid fears of another market intervention by the Japanese authorities, at least for now. However, according to market analysts, the dollar remains on track to return to the 145 yen level and possibly rise to 147.66 yen, a level not seen in more than 32 years.

“Until (the Bank of Japan) changes its policy, the yen will not stop falling as the impact of the (currency) intervention will be limited,” Yamaguchi said. The government’s attempt is a “drop of water on a hot stone”.

Behind the yen’s fall since early March is the BOJ’s stubborn determination to maintain its monetary easing policy at a critical time when the Federal Reserve, like many other countries’ central banks, is continuing its policy. rate hike campaign to beat inflation.

The Swiss National Bank raised its benchmark interest rate by 0.75 percentage points on Thursday, marking the end of an era of negative interest rates in Europe.

Inflation is a less pressing concern in Japan, with price increases remaining relatively slow compared to the US and European countries. Japan’s basic consumer prices in August increased 2.8% from the previous year.

The BOJ left its extremely accommodative policy unchanged on Thursday, in stark contrast to the Fed, which on Wednesday implemented a policy rate hike of 0.75 percentage points and suggested more aggressive hikes on the way.

The divergence of approach will only increase the interest rate differential between the US and Japan, attracting investors to the dollar.

The rate gap is unlikely to narrow anytime soon, as BOJ Governor Haruhiko Kuroda said at a press conference Thursday that he does not expect rate hikes in the near future to support the pandemic-affected economy.

“When I say ‘for the moment’ I don’t mean two or three months. I mean two or three years,” said the governor, whose term as head of the BOJ will expire in April.

The strength of the dollar also reflects the solid recovery of the world’s largest economy from the COVID-19 shock.

“The yen will naturally become strong once the US economy starts to slow, which will not happen until early next year,” said Tomoichiro Kubota, senior market analyst at Matsui Securities Co.

Analysts say Japanese authorities could act again if the dollar rises to around 145 yen, as seen in Thursday’s speech, and market participants will be nervous about crossing that line.

Masato Kanda, deputy finance minister for international affairs, told reporters after the speech that the ministry “will continue to watch foreign exchange movements with a sense of urgency.”

Analysts say yen buying intervention is more difficult than yen selling as authorities have to rely on foreign reserves to sell in the market.

According to official data, Japan’s foreign reserves, consisting mainly of securities and deposits denominated in foreign currencies, stood at $ 1.29 trillion at the end of August.

Market participants are also skeptical that Japan will be able to continue intervening in the market. It would be difficult to get approval from the US authorities as they are likely to be concerned about a drop in the dollar pushing up import costs and inflation, analysts said.