Yen’s Gradual Decline Reduces Likelihood of Immediate Intervention

According to former top currency diplomat Hiroshi Watanabe, the gradual depreciation of the yen’s value has reduced the likelihood of imminent market intervention by Japanese authorities. Unlike a year ago when Japan intervened in the currency market to bolster its currency, the current slow pace of the yen’s fall suggests that intervention is less likely.

In September of the previous year, Japan conducted currency intervention for the first time since 1998. This intervention came in response to the Bank of Japan’s decision to maintain an ultra-loose monetary policy, which led to the yen weakening to as low as 145 per dollar. Japan intervened once again in October when the yen reached a 32-year low of 151.94 against the dollar.

Market participants are now closely monitoring the possibility of another round of intervention, especially as expectations of sustained higher U.S. interest rates have pushed the dollar close to the 150-yen level. Some market observers consider this level as a crucial threshold for Tokyo. Currently, the U.S. dollar is trading at 149.83 yen.

However, Hiroshi Watanabe, who oversaw Japan’s currency policy from 2004 to 2007, believes that the chances of renewed currency intervention by Tokyo are slim at the moment. He noted that last year’s intervention was primarily a warning to the markets. Authorities were concerned that if they allowed the dollar/yen exchange rate to move unchecked, it could have surged to 155 or 160. However, Watanabe stated that the situation has changed, as the dollar/yen pair has been trading within a range of 145-150 yen for the past year.

He added, “There’s no sense of imminence because the dollar/yen level hasn’t changed much from a year ago, and it doesn’t seem like the yen will start to plunge even if it breaches the 150 mark.”

Watanabe also commented on the future movement of the U.S. dollar, stating that it is unlikely to rise significantly further. He cited the fact that the U.S. Federal Reserve’s rate hike cycle is nearing its end. While acknowledging that authorities may need to intervene if there are significant currency fluctuations, Watanabe believes that intervention is less effective when currency movements are gradual.

Furthermore, Watanabe pointed out that although a weaker yen benefits Japanese exports, it poses challenges due to the country’s heavy reliance on imports for various goods, including fuel, food, and raw materials. Rising import costs have contributed to inflation remaining above the Bank of Japan’s 2% target for over a year, putting pressure on the central bank to adjust its monetary policy.

In Watanabe’s view, the Bank of Japan should end negative interest rates and the bond yield cap simultaneously, as the central bank has lagged in responding to rising inflation. He also suggested that with U.S. and European central banks likely to refrain from cutting interest rates in the coming year, BOJ Governor Kazuo Ueda can phase out the massive stimulus without fearing a disruptive strengthening of the yen.

Watanabe concluded by saying, “Markets are giving Ueda a free hand. There’s scope for the BOJ to end what has become an abnormal policy.”