Economic Trends
2024.04.26
Japanese economy
Monetary policy/Bank of Japan
money
A growing sense of caution about foreign exchange intervention
~ Breaking through 155 yen to the dollar, will it go further? ~
Hideo Kumano
Abstract
The yen has weakened to around 155 yen to the dollar. The Japanese government is wary of the yen’s depreciation, which would cause prices to rise, and is threatening foreign exchange intervention. The author is keeping a close eye on the possibility that foreign exchange intervention may be implemented at any time now that the price has exceeded the 155 yen line. However, the effect of foreign exchange intervention is limited, and the reality is that there is still little material to correct the trend of yen depreciation in the medium to long term. This is also a problem for the Bank of Japan.
table of contents
In the foreign exchange market, the yen depreciated to over 155 yen to the dollar on April 24th, and further weakened to the low 155 yen level on the 25th and 26th (Chart). It would not be surprising if foreign exchange intervention were carried out at any time. Most market participants must feel that way.
The recent tension between Israel and Iran has calmed down, and the situation is no longer fueling the soaring price of crude oil. However, in the US GDP for January-March 2024, the personal consumption deflator rose at an annual rate of 3.4% compared to the previous quarter, indicating that inflationary pressures are still increasing. It seems that there is a delay in the Fed’s interest rate cut by the end of the year, and in some cases, there is more awareness than ever of a scenario where there is no interest rate cut. This has caused U.S. long-term interest rates to rise to the 4.7% range, creating a strong dollar trend. In anticipation of the Fed’s policy stance, the dollar-yen exchange rate gradually strengthened against the dollar, reaching a level of 155 yen.
Additionally, Japan is preparing for a long holiday from the end of April. There is speculation that the yen may depreciate speculatively during the period when Japanese markets are closed. That is why the Japanese government may want to take advantage of this timing to drive a wedge into speculation about the yen’s depreciation. That is why I feel that foreign exchange intervention could occur at any time.
So, if foreign exchange intervention is implemented, will it be highly effective? At the time of the intervention on September 22, 2022, the dollar exceeded 145 yen and a dollar selling intervention of 2.8 trillion yen was carried out. The yen’s depreciation will not stop there, reaching 150 yen in October. The government managed to stop the flow by implementing two additional interventions (6.3 trillion yen on October 21 and 24). It is not easy to change the flow of exchange rates with a single intervention. Monetary authorities will have to be prepared to fight a sustained battle this time as well.
On the other hand, some people are waiting for foreign exchange intervention. When foreign exchange intervention is carried out, there are people who try to sell the yen and buy the dollar once the yen has strengthened. The idea is that the effects of intervention will be limited, and this is a speculative bet on the possibility that the yen will depreciate again. When there is such speculative behavior, self-fulfilling foreign exchange intervention is likely to be less effective. Therefore, the government cannot complete its intervention in one go, but has to repeat it several times.
Looking at it from a more optimistic perspective, the fact that there are currently no strong factors that would cause the yen to appreciate is also contributing to the yen’s depreciation. The gap between domestic and foreign interest rates is widening due to the rise in US long-term interest rates. The trade balance is firmly in the red. Movements to make real investments within Japan, such as direct investment in Japan, are limited to those relying on subsidies. In the first place, the fact that Japan’s economic growth rate is not high potentially reduces the motivation for people to “buy Japan.” The fundamentals are not a trend toward a strong yen, but rather a trend toward a weak yen.
If we were to look for factors that would correct the yen’s depreciation, the biggest factor would be the Bank of Japan’s policy revisions. The highlight of the April decision-making meeting is President Ueda’s reaction. After he lifted negative interest rates on March 19, he said, “accommodative financial conditions can be maintained.” The question now is whether the Bank will revise this announcement and change the direction of monetary policy to a stance of hastening policy adjustments in order to prevent the yen from depreciating, which would lead to the risk of excessive price rises.
When Governor Ueda gave a speech in Washington on April 19, he said, “If the underlying inflation rate continues to rise, there is a high possibility that the Bank will decide to raise interest rates.” However, despite these statements, many investors understand that Governor Ueda’s basic stance is to maintain an accommodative financial environment for the time being, and do not see a dramatic change in policy yet.
The outcome of the U.S. presidential election will be one factor in exploring the possibility of correcting the excessive depreciation of the yen. On April 23, Trump, who is considered to be the Republican candidate, commented on social media about the dollar’s appreciation and yen’s depreciation for the first time in 34 years, calling it “a disaster for American manufacturing.” This statement was made from the standpoint of viewing the US trade deficit as a problem. Mr. Trump is conscious of the trade balance between Japan and China.
This stance by Mr. Trump has led to claims that the Federal Reserve should begin lowering interest rates as soon as possible. Normally, if Trump were to gain the upper hand, it would be more likely that the Fed would cut interest rates this year, but so far this is not a realistic scenario. Therefore, the actual exchange rate has not been pushed towards the yen’s appreciation.
In the future, as the presidential election on November 5 approaches, if the incumbent President Biden is at a disadvantage and Mr. Trump gains the upper hand, Mr. Trump’s intentions will likely be reflected in the exchange rate. Regarding the government’s intention to intervene in foreign exchange, there are still many factors that support the yen’s depreciation and dollar strength, and the reality is that the factors that could reverse the trend toward a strong yen are limited.
Hideo Kumano