–Tokyo Would Need Washington’s Consent and Help to Have Much Impact
-US Has No Compelling Reason Yet to Step into FX Market
–Japan’s Dollar Selling Ammunition Limited to Its Foreign Reserves
By Max Sato
(MaceNews) – Japanese policymakers are using verbal warnings and inquiries on market levels to stop the yen from depreciating rapidly against the dollar as the hurdle for winning its allies’ blessing for forex intervention remains high and its dollar-selling war chest is limited compared to its ample yen funds.
Finance Minister Shunichi Suzuki told reporters Wednesday that the government, in coordination with the Bank of Japan, will stay on alert, watching how the market is evolving.
“If the situation like this continues, we will do what we have to do in the market without ruling out any options,” he said.
Later, Vice Finance Minister for International Affairs Masato Kanda, who is in charge of forex intervention, also told reporters, “We are prepared to take appropriate steps without ruling out any options.”
“Excessive fluctuations and disorderly movements in the currency market are harmful to the economy and finance,” Kanda said, echoing concerns among Japanese leaders that the weak yen is adding to already high import costs and reducing the purchasing power of households and businesses.
In addition, Japanese news media reported that the BOJ’s currency team was conducting “rate checks” during Tokyo trading hours, asking foreign exchange market participants at what levels dollar/yen buying and selling indications were.
This caused speculation that intervention was imminent, pushing the dollar back down to around Y142.80 from a high of Y144.80 seen earlier in the day.
The BOJ’s forex rate inquiries can be part of its routine market observation or a precursor to actual intervention.
But Japan will have to clear a high hurdle if it decides to take action in the market.
The Ministry of Finance must coordinate closely with the U.S. Treasury Department and gain its consent on conducting market operations to sell dollars for yen or to sell yen for the dollar to maximize the impact. The BOJ acts as an agent for the MOF to execute intervention orders.
It remains uncertain whether Washington would agree if Tokyo asks for help to slow the dollar’s rise or to stop the dollar from appreciating further. The US has no compelling reason to do so at this point. The strong dollar helps cap import costs for U.S. households and businesses and there is no signs that the dollar’s rise is harming the global financial system.
Technically, Japan could intervene alone but its effect on the dollar-yen exchange rate would be limited, given the large scale of global forex trading.
Another sticky point for Japan is that unlike yen-selling interventions, for which the government basically has an unlimited supply of yen, its funds for dollar-selling operations are limited to Tokyo’s foreign reserves, which totaled $1.29 trillion (Y184 trillion) at the end of August.
The daily trading volume in the global forex market was estimated at $6.6 trillion in 2019, according the latest data from the Bank for International Settlements. The scale of the Tokyo forex market was estimated at $375.5 billion at the time and had grown to $478.5 billion by April this year, which would be Y68 trillion at the current rate of Y143 to the dollar.
That’s a massive flow compared to Japan’s past daily forex intervention amount, which was often under Y1 trillion. In its aggressive one-day campaign to stop the yen from surging against the dollar in 2011, it spent as much as Y8.1 trillion on Oct. 31, but that sum would be still only about 10% of today’s Tokyo market trading volume.
Japanese policymakers are well aware that any currency intervention must be conducted forcefully at an unsuspected timing to maximize its impact, preferably with the U.S. and other major economies. With that prospect uncertain, MOF officials seem to be prepared but have not stepped into the forex market, hoping to weather the storm without being drawn into a war with market forces.
On the monetary policy front, the BOJ is unlikely to raise interest rates just to support the yen’s value at a time when confidence in the Japanese currency or financial system is not at stake.
BOJ policymakers are expected to maintain their easing stance for now. They do not expect inflation to be anchored around its stable 2% target any time soon, and that conviction is unlikely to change when they release their updates in the quarterly Outlook Report in October.
Unlike the tight labor market and strong economic recovery from the Covid slump in the U.S., domestic demand in Japan is not overheating and consumer inflation is rising above 2% because of an earlier surge in global energy and commodities markets.
Governor Haruhiko Kuroda has repeatedly said the bank would not consider raising interest rates while inflation is not accompanied by solid wage growth and supply continues to exceed demand in the Japanese economy.
Japan has not intervened in the forex market after having spent Y9.09 trillion on selling yen for the U.S. currency in the final quarter of 2011.
MOF data showed that Japan intervened in the foreign exchange market on Oct. 31, 2011, when the yen hit a fresh life-time high of Y75.32 versus the dollar, and conducted further yen-selling operations from Nov. 1 to Nov. 4.
In 2011, Tokyo also conducted currency market intervention in March and August with the former operation forming part of a coordinated move by the Group of Seven industrialized nations to aid Japan in the wake of the March 11 earthquake disaster. That intervention was the first concerted G7 forex action since September 2000, when the euro came under heavy selling pressure as capital flowed into the U.S. stock market at the peak of the IT bubble.