Analysis suggests that politics and the Federal Reserve could potentially influence Japan’s stance on yen intervention.

By Better Today On Aug 23, 2023

Yen Intervention Threshold High Given Slow Pace of Yen Falls

Tokyo, Aug 23 – Japanese authorities are preparing for potential turbulence in the currency market following the Federal Reserve’s Jackson Hole symposium this week. There is concern that new hawkish signals from U.S. central bankers could trigger another sharp yen selloff, forcing Tokyo to intervene to prop up the currency.

The annual gathering of Fed officials and other global policymakers has historically been an opportunity for central bankers to regroup and announce their next steps to the market. Initially, investors expected Fed Chair Jerome Powell to end interest rate hikes as inflation showed signs of moderation.

However, Japanese officials are now worried that Powell may signal the opposite, given lingering price pressures. This could trigger a repeat of last year’s yen selloff against the dollar, leading to intervention by Japanese authorities.

While the yen’s performance is largely influenced by dollar movements, its weakness has become politically problematic for Prime Minister Fumio Kishida and the Bank of Japan. The BOJ’s ultra-loose monetary policies have been blamed for inflating import costs.

Authorities are less worried about a weak yen compared to September and October last year, but the chance of intervention will increase if a worsening economy affects the administration’s approval ratings.

Market expectations suggest that the Fed will maintain interest rates in the current range until the second quarter of next year before starting to ease. Investors will be closely watching Powell’s speech on Friday for any clues about additional rate hikes.

BOJ Governor Kazuo Ueda is also scheduled to attend the Jackson Hole meeting, which has thrown Japan curve balls in the past. In 2010, former Fed Chair Ben Bernanke’s suggestion of deploying quantitative easing triggered a yen spike that forced the BOJ to cut short its retreat and call an emergency meeting in Tokyo.

This time, concerns are centered around yen weakness. Although Japan has issued fewer verbal warnings about recent bouts of yen selling, authorities see the threshold for intervention as higher compared to last year. The slower pace of yen declines and the revival of inbound tourism have turned public attention to the benefits of a weak currency.

However, the more passive approach could change if hawkish comments by Powell drive up the dollar/yen exchange rate at a faster speed. Government officials with direct knowledge of Japan’s currency policy state that Japan is unlikely to intervene as long as the movements are gradual. They liken the situation to cracking down on speed limit violations.

While authorities claim that speed is the key factor in deciding when to intervene, a breach of the 150 yen threshold could heighten political pressure on Prime Minister Kishida to take action. With his approval ratings declining, Kishida recently unveiled a plan to cushion the impact of rising fuel costs driven by the weak yen.

Japan faces a dilemma as core inflation has exceeded the BOJ’s 2% target for 16 consecutive months, with higher import costs being passed on to firms. Worried about a fragile economy, the BOJ has emphasized its commitment to keeping interest rates ultra-low, despite raising a cap on long-term bond yields last month.

The BOJ’s dovish stance, combined with the possibility of higher U.S. interest rates, has kept the dollar hovering around a nine-month high against the yen. However, there are doubts that intervention would have a significant impact, as authorities can only smooth the pace of currency movements, not affect levels or trends, which are largely influenced by U.S. monetary policy.

In conclusion, Japanese authorities are closely monitoring the Jackson Hole symposium, as new hawkish signals from the Fed could trigger another sharp yen selloff. While the threshold for intervention is higher compared to last year, a breach of the 150 yen mark could increase political pressure on Prime Minister Kishida. However, doubts remain about the effectiveness of intervention in influencing currency levels and trends.