Japan’s Yen Intervention Strategy Faces Big Test From US Data

Japan’s Yen Intervention Strategy Faces Big Test From US Data

Japan’s currency is yet again at the mercy of the US economy, with Tokyo’s efforts to buy time for the beleaguered yen vulnerable to shifts in the outlook for interest rate cuts by the Federal Reserve.

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(Bloomberg) — Japan’s currency is yet again at the mercy of the US economy, with Tokyo’s efforts to buy time for the beleaguered yen vulnerable to shifts in the outlook for interest rate cuts by the Federal Reserve.

Friday’s US jobs figures are the next test for Japanese officials, who’ve been ramping up warnings to traders that they are ready to intervene in the market. If the data provide further signs that the American economy is weathering the impact of high rates, the yen is at risk of testing the 152 level against the dollar, seen by some analysts as a line in the sand for Japan. 

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The labor market numbers are followed by next week’s US inflation readings on Wednesday, the day Prime Minister Fumio Kishida meets President Joe Biden in Washington. While the timing would make it awkward for Japan to intervene, given Kishida’s aim of showcasing unity with Biden, the risk is the yen keeps depreciating if it breaks 152 and authorities fail to back words with actions. 

Despite a gain Thursday on haven demand, the currency continues to trade within easy reach of its weakest level in almost 34 years. The Bank of Japan’s first rate hike since 2007 has done little to change the prevailing market dynamics dominated by the Fed. Bets on US policymakers cutting rates by their June meeting briefly dipped below 50% earlier this week after stronger-than-expected US manufacturing data, prompting another round of thinly veiled intervention warnings from Japan’s Finance Minister Shunichi Suzuki.

It’s an increasingly frequent pattern. US data or remarks by Fed officials drag the yen lower, and Japanese currency authorities respond with verbal warnings as they try to buy time. The question is how long Japan can withstand this precarious situation. Many economists flag the risk that the BOJ may need to conduct another rate hike earlier than expected. 

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“A prolonged battle seems inevitable,” said Daisuke Karakama, chief market economist at Mizuho Bank. “That will probably intensify market attention on whether the BOJ can raise the rate again soon.”

Japan showed in 2022 that it wasn’t afraid of stepping into markets to prop up the yen, with a $60 billion splurge that stopped the dollar crossing the 152 mark. Currency officials justified the entry into markets as a response to excessive moves rather than a defense of any levels. That’s an explanation on the acceptable threshold for international agreements on allowing markets to determine levels.

Read more: Japan FX Chief Calls Yen’s Slump Unusual, Vows to Act if Needed

A weak yen has helped Japan’s biggest exporters and its globally focused companies rake in record profits while turning the country into an affordable destination for foreign tourists. But it has also squeezed the finances of importers, domestically focused businesses and households by pushing up input costs, energy prices and helping to fuel the strongest inflation in decades. 

With the yen at around half its value just 12 years ago and per capita gross domestic product in dollars at the lowest in more than two decades, policymakers would rather it didn’t get much weaker.

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The BOJ’s move to raise rates was expected to ease some of the pressure on Japan’s currency, but BOJ Governor Kazuo Ueda’s emphasis on continued easy financial conditions gave investors the view that further hikes were a ways off.

Analysts cite the gaping rate differentials between the US and Japan. The BOJ set the upper bound of its benchmark rate at 0.1%, far below the 5.5% equivalent rate maintained by the Fed. 

Read more: Why Even a Historic BOJ Rate Hike Has Failed to Save the Yen

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With the next BOJ policy meeting weeks away, Masato Kanda, Japan’s top currency official, will be on the front lines to discourage speculative trading. Kanda orchestrated the currency interventions in 2022, and the term “Kanda Ceiling” is gaining popularity in a corner of Japan’s social media to refer to the 152 level.   

“I strongly feel the recent sharp depreciation of the yen is unusual, given fundamentals such as the inflation trend and outlook, as well as the direction of monetary policy and yields in Japan and the US,” Kanda said in an interview with Bloomberg last week. “Many people think the yen is now moving in the opposite direction of where it should be going.” 

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Japan has ample firepower to enter markets with foreign-exchange reserves standing at $1.15 trillion at the end of February. About $175 billion of that amount is in dollar funds that authorities can tap to intervene without selling long-term securities, according to an estimate by Goldman Sachs Group Inc. Still, securing resources to buy the yen isn’t as easy as it would be to do the reverse. 

Kanda’s former boss at the finance ministry, Tatsuo Yamasaki, said this week that Japan is ready to step in as soon as the yen falls beyond its current range. Yamasaki flagged the risk of intervention two days before Japan’s first move in 2022.

Read more: Ex-Official Who Warned of 2022 Yen Intervention Sounds New Alarm

In a Bloomberg survey following the BOJ’s policy shift, some 54% saw the risk of additional rate hikes due to the weak yen. It wouldn’t be an easy decision, however, as Japan’s economy isn’t on a firm footing. Many economists expect a contraction in the first three months of 2024.   

“Japan’s economy isn’t ready for consecutive rate hikes,” Karakama said. “But given the currency, you can’t completely rule out the chance of an early rate hike.” 

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