News Tech: For the first time since 1998, Japan intervened to support the yen after its central bank caused further falls in the currency by maintaining ultra-low interest rates while its international competitors raised their rates.
The intervention shows that Prime Minister Fumio Kishida’s government has reached the limit of its patience after the yen tumbled around 20% against the dollar this year as hedge funds kept adding to short bets on the yen. The question now is whether the unilateral action will work, with the currency already paring gains within hours.
The yen rose as much as 2.3% against the dollar, pulling back sharply from the lows of the day when it had breached a key psychological level of 145, as top currency official Masato Kanda said Thursday the government was taking “decisive action.”
“I think they went in solo, but they can’t do so without at least informing the US,” said Nobuyasu Atago, chief economist at Ichiyoshi Securities and a former BOJ official. “If they really want to change the yen’s slide as a trend, I think the government needs to get its act together with the BOJ.”
In less than an hour, the yen increased five times versus the dollar, reaching an intraday high of 140.70, before trading at about 142.73 at 7:33 p.m. in Tokyo. It had previously fallen to 145.90 as the Bank of Japan continued to keep interest rates low despite the Federal Reserve raising rates for the fifth time this year.
Late in the afternoon, Kanda stated, “The government is concerned about excessive moves in the foreign exchange markets, and we just taken serious measures.” The rapid and lopsided changes that are currently occurring in the foreign currency market are being caused by speculative actions. If the Ministry of Finance’s involvement doesn’t deter speculators, there are risks involved. Hedge funds have been increasing their wagers against the currency, and Goldman Sachs Group Inc. has warned that it might fall as low as 155.
According to Christopher Wong, a currency strategist at Oversea-Chinese Banking Corp., “at best, their intervention can serve to halt the speed of yen depreciation.” “Unless the dollar and US Treasury yields swing lower, the move alone is not expected to change the underlying trend.” At a briefing in the afternoon in Tokyo, BOJ Governor Haruhiko Kuroda emphasised that no rate increases were planned and that, in theory at least, the direction of future policy would not shift for at least the next two or three years. Even so, when he stands down in April of next year, his influence over policy will diminish.
Masamichi Adachi, chief Japan economist at UBS Securities, stated that “today’s conclusion confirms my opinion that the probability of policy change is essentially zero under Kuroda’s governorship.” With the European Central Bank and the Swiss National Bank also raising interest rates to combat soaring inflation, Kuroda’s stance distinguishes him from other central banks that have also previously used negative interest rates.
According to Jian Hui Tan, a strategist at Informa Global Markets, “for the time being, we could see some unwinding of yen shorts, particularly if the BOJ continues to participate in the market on behalf of the finance ministry over early next week.” What it most likely does is buy Japan some time in the hopes that the overall strength of the USD moderates a bit and any further yen depreciation may be halted. The combination of government involvement and central bank easing points to a division of labour to support the nation’s stance on policy.