–Finance Minister Suzuki Says Govt Steps in To Stem Speculative Move
–MOF Suzuki: To Take Necessary Steps on Excessive Fluctuations
–BOJ Kuroda: No Need to Change Basic Yield Curve Control Easing Guideline for 2 to 3 Years
–BOJ Kuroda Before Intervention: YCC Designed to Correct Tight Yen Funds in Event of Yen-Buying FX Operations
–BOJ Kuroda: Yen Is Not Only Currency Depreciating Against Dollar
By Max Sato
(MaceNews) – The Japanese government and the Bank of Japan stepped into the currency market on Thursday evening to stop what they see as speculative forces from selling yen further against the dollar, defending the Y146 level, in their first yen-buying foreign exchange operation in about 24 years.
Actual intervention, instead of verbal warnings from top Ministry of Finance officials made in recent days, prompted the dollar to slip back to just above Y140 from Y145.90, but it is uncertain how long its effect will last as there is no indication that the U.S. joined the dollar-selling operation and the Federal Reserve’s aggressive tightening has been attracting investors to dollar assets.
It was the first Japanese intervention to protect the value of the yen since June 17, 1998, when the Ministry of Finance won support of the U.S. Treasury Department to conduct a joint forex intervention, sending the dollar sharply down to Y142 during Tokyo trading hours and to Y136 in New York from above Y146 two days earlier. Tokyo spent Y231.2 billion ($1.65 billion) on that day while Washington is estimated to have spared $833 million.
It was also the first forex intervention by Japan in nearly 11 years since the final quarter of 2011, when it spent a massive Y9.09 trillion ($64.9 billion) on selling yen for the U.S. currency, with Y8.07 trillion spent on Oct. 31 alone. 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.
“The recent foreign exchange market saw a rapid, one-sided movement against the backdrop of a speculative movement,” Finance Minister Shunichi Suzuki told a news conference on Thursday evening, announcing Japan had just intervened. “The government is concerned about excessive fluctuations. Exchange rates should be determined in the markets as a principle but we cannot ignore repeated excessive fluctuations caused by speculation.”
Suzuki said the government stays on alert and “will take necessary measures on excessive fluctuations.” He declined to discuss the details of the latest forex action including its scale and at what levels it was conducted.
Unlike yen-selling intervention, for which the government basically has an unlimited supply of yen, the funds for dollar-selling operations are limited to its foreign reserves, which totaled $1.29 trillion (Y180 trillion) at the end of August.
Vice Finance Minister for International Affairs Masato Kanda told reporters in early afternoon Tokyo time Thursday that the MOF was “standing by, ready to go any time,” when asked about the possibility of forex intervention.
A little over an hour before the Bank of Japan executed orders from the MOF to buy yen for the dollar, BOJ Governor Haruhiko Kuroda defended the bank’s decision on Thursday to maintain its zero to slightly negative interest rate targets along the yield curve and large asset purchases to help the economy fully recover from the pandemic-caused slump and anchor inflation around its stable 2% target.
Critics say the bank’s monetary easing stance is fueling the yen’s slide, which is adding to already high import costs and hurting households and small businesses.
But at a news conference after the bank’s two-day policy meeting, Kuroda stuck to his point that Japan’s economy still needs monetary support as it has a wide negative output gap and falling real wages. Japan’s inflation rate is around 3% while some other major economies are struggling with 8% to 10%, he added.
The widening U.S.-Japan interest rate differential based on the Fed’s tightening mode and the BOJ’s persistent easing stance is one of the factors fueling the yen’s weakness against the dollar.
But Kuroda pointed out that while the yen’s value has fallen 20% against the dollar in the past several months, sterling (16%) and the euro (13%) have also depreciated against the U.S. unit even though the Bank of England and the European Central Bank are raising interest rates to fight decades-high inflation. South Korea’s won is also weakening against the dollar, although Korea’s 10-year bond yield is above the U.S. level, he added.
“In the foreign exchange market, in addition to the supply and demand balance along with commodity price rises, the focus has been on the widening gap between domestic and overseas interest rates,” Kuroda said.
“The widening rate differential reflects the U.S. inflation outlook being revised up but monetary tightening itself exerts downward pressure on the U.S. economy. Despite those opposing factors, the yen has depreciated and it is a one-sided movement and it is also believed to be influenced by speculative moves,” he said, using coded language used in the past to hint that the Japanese authorities were ready to intervene to stem speculation-fueled lopsided currency fluctuations.
“The development of the yen’s depreciation like this makes it hard for firms to formulate business plans and make the outlook more uncertain, and that’s why it is not desirable for the Japanese economy,” said the governor, repeating his recent warning. “The Bank of Japan will coordinate closely with the government and will pay a close attention to financial and foreign exchange markets and their impact on the Japan’s economic activity and prices.”
Kuroda said the BOJ is unlikely to change the yield curve control guideline “for the time being.”
Under the current framework adopted in September 2016, the BOJ is keeping the 10-year government bond yield, the benchmark for long-term borrowing costs, at around zero percent by buying “a necessary amount” of Japanese government bonds “without setting an upper limit,” and to keep the overnight interest rate at minus 0.1% by charging 0.1% interest on a part of cash reserves parked at the bank by financial institutions.
“In the future, I think it is possible that the monetary policy at the time will result in changing the forward guidance, but for the time being, from the viewpoint of supporting economic recovery and achieving the 2% price stability target that accompanies with wage hikes, I don’t think there is any need to change our forward guidance at this point,” Kuroda said. “Even when it is changed, it will be based on the economy and prices at the time.”
“Other countries that had introduced negative interest rates but have raised rates to cope with 8% to 10% inflation and in the process have moved out of negative interest rates. You cannot compare with those countries with different economic and price conditions (from Japan’s) and say Japan should also end negative interest rates because they have done so,” he said.
Asked to elaborate on his remarks on “for the time being,” Kuroda said, “The forward guidance reflects economic activity and prices and is based the outlook for interest rates and monetary base for the time being, which is not two to three months, but two to three years.” His comment confirms the expectation that the BOJ’s main policy stance is unlikely to change under Kuroda whose second five-year term is scheduled to end on April 8, 2023, and not so soon after that.
He said the basic mechanism behind prices remains intact: Inflation measured by the core consumer price index (excluding fresh food) is likely to ease below 2% in fiscal 2023 after accelerating above 2% in the current fiscal year, even though the BOJ board’s median forecasts are set to be revised up from 2.3% for fiscal 2022 and 1.4% for the next fiscal year.
“Having said so, there may be a fine-tuning (to the forward guidance) in tandem with economic activity and prices. But changing the basic forward guidance will become conceivable only when the economy and prices come to a turning point that will require monetary policy to be modified,” Kuroda said.
Asked about a possible effect of yen-buying forex intervention exerting upward pressures on Japanese interest rates, the governor replied, “As long as YCC (yield curve control) is maintained, even when such a thing happens, tightened yen funds would be automatically resolved.”