Masato Kanda, Japan’s top currency diplomat, has underscored the possibility of taking action against disorderly and speculative-driven foreign exchange fluctuations, signaling Tokyo’s willingness to intervene to bolster the yen, which remains fragile.
The concern over recent declines in the yen is evident, as Bank of Japan Governor Kazuo Ueda highlighted currency movements during discussions with Prime Minister Fumio Kishida. Kanda, also Japan’s vice minister of finance for international affairs, emphasized that intervention might be necessary if exchange rates deviate significantly from underlying fundamentals due to excessive speculation, disrupting market functionality.
“While the government prefers exchange rates to reflect fundamentals steadily without intervention, we are prepared to take appropriate action in the face of excessive fluctuations or disorderly movements,” stated Kanda, reiterating Japan’s steadfast approach to managing currency stability.
Ueda echoed similar sentiments, indicating that the central bank would closely monitor how yen depreciation might impact inflation, suggesting that currency fluctuations could influence the timing and pace of future interest rate adjustments.
The yen’s recent depreciation, while beneficial for Japanese exporters, poses challenges for policymakers due to increased import costs, inflationary pressures, and constraints on household budgets.
Last week, Tokyo is believed to have intervened in the forex market on multiple occasions to support the yen after it plunged to levels not seen in over three decades. Reports from the Bank of Japan suggest that authorities spent over 9 trillion yen ($58.4 billion) to defend the currency, resulting in a notable rebound from a 34-year low against the dollar to a one-month high within a week.
The yen, down nearly 9% against the dollar this year, is currently trading around 154.50.
Japanese businesses, traditionally in favor of a weaker yen to boost exports, are now expressing concerns about excessive depreciation. Masakazu Tokura, chairman of the influential Keidanren business lobby, emphasized that a yen weaker than 150 against the U.S. dollar is problematic, although acknowledging the timeliness of any intervention by authorities.
The persistent decline of the yen presents a dilemma for the Bank of Japan. Despite abandoning negative interest rates in March, the yen continues to face downward pressure amid rising U.S. rates and stagnant Japanese interest rates.
Ueda hinted at the possibility of rate hikes in the coming years, albeit cautiously, as premature tightening could jeopardize Japan’s fragile economic recovery. While analysts anticipate interest rate increases later this year, the pace of subsequent adjustments remains uncertain.
