Investors are on high alert for the risk of Intervention as the yen approaches 150 per dollar. However, Japanese authorities may find it difficult to prop up their currency and justify such actions. The yen’s recent slide is primarily due to the Bank of Japan’s reluctance to exit its ultra-easy monetary policy while the U.S. Federal Reserve keeps its options open for further tightening.
The dollar-yen pair typically follows the gap between the countries’ long-term yields, which currently favors the dollar by 380 basis points. Last week, U.S. Treasury yields surged after Fed officials hinted at another Rate increase this year. On the Japanese side, BOJ Governor Kazuo Ueda has repeatedly emphasized the need for a patient approach to tightening its loose policy, dampening expectations for a hawkish shift in the coming months.
Currency intervention is financially risky and politically charged. The BOJ would need to draw down significant amounts of dollar reserves to make any impact in the $5 trillion currency market. Moreover, Tokyo could face resistance from Washington due to the major rich democracies’ commitment to letting markets determine exchange rates.
Bart Wakabayashi, Tokyo branch manager at State Street Bank and Trust, highlighted the disparity between the Fed and the BOJ’s stance on rate hikes, making it difficult to justify a strong yen in the current conditions. Wakabayashi questioned the feasibility of defending the yen and noted that there is not much Tokyo can offer in this regard. Many analysts and investors, including Wakabayashi, consider the 150 yen per dollar level as a red line for intervention due to its significance in the rising costs of living.
Finance Minister Shunichi Suzuki stated that the ministry does not have a specific “defence line.” However, he has repeatedly warned this month that Tokyo is closely monitoring the currency market and is prepared to respond to excessive volatility. Masayuki Kichikawa, chief macro strategist at Sumitomo Mitsui DS Asset Management, believes that if the Ministry of Finance does not defend the yen at 150, market participants will attempt to push it lower to 155. He emphasized the political and economic challenges associated with yen weakness, as it contributes to the rising cost of living.
Intervention became imminent last October when the yen reached a 32-year low at 151.94. Japanese authorities intervened heavily to stabilize the currency, aided by a cooling of U.S. inflation that reduced expectations of additional Fed tightening. Japanese authorities have consistently emphasized that intervention aims to temper volatility and deter speculators when currency moves deviate from fundamentals. Currently, market volatility remains subdued, and yen speculative short positions have decreased.
Some analysts argue that fundamentals support a weaker yen, but the specter of intervention and the possibility of the BOJ moving away from negative interest rates have kept it from depreciating further. Interestingly, the yen has actually strengthened against the euro and sterling this month. Treasury Secretary Janet Yellen stated that the U.S. generally understands the need to address undue volatility but does not attempt to influence exchange rates. The details of any intervention would determine Washington’s response.
Ultimately, taking action through intervention is likely to be seen as less costly than doing nothing. Aninda Mitra, head of Asia macro and investment strategy at BNY Mellon Investment Management, believes that intervention is ultimately a political decision. However, from an economic and monetary standpoint, it may not have a significant impact due to the prevailing rate differentials that work against the yen.
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