The Japanese yen has been weakening, and some market watchers are predicting that the country’s central bank may intervene in response to its ultra-dovish policy in a world of high rates and high inflation. Foreign investors are enjoying a rally in Tokyo stocks thanks to the cheaper exchange rate. The Japanese yen traded just north of 140 against the US dollar on Monday, and analysts are speculating whether the government will intervene to support the currency.
Interventions May Increase
Last year, Japan’s Finance Ministry intervened with about $68bn to prop up the yen on three separate days as the currency weakened to levels not seen since 1990. Interventions are usually unannounced and consist of the central bank buying large amounts of yen using billions in dollar reserves. HSBC’s head of Asian foreign exchange research, Joey Chew, stated that the yen’s recent movement will prompt questions about whether the government will intervene to support the currency.
Further Interest Rate Hikes May Weaken the Yen
Goldman Sachs economists noted that further interest rate hikes from the US Federal Reserve will weaken the yen further. With the Bank of Japan maintaining its ultra dovish stance of negative interest rates, the rate differentials between the US and Japan’s central bank will persist. The Bank of Japan’s next monetary policy meeting is scheduled to be held on June 15 and 16.
The Possibility of Government Intervention
Masato Kanda, Japan’s vice minister of finance for international affairs, told reporters last week that the government would step in if needed as the yen showed further weakening. Chew stated that government officials could intervene when the yen reaches the 145 level against the greenback. She noted that the month-on-month change seen in the currency before the intervention in September had a range of 6% to 8%. The recent movements in the currency show a 4% to 5% range. “To get to above 6% m-o-m, USD-JPY would have to rise to 145,” she said.
Goldman Sachs economists noted in a May 26 research report that if markets continue to price a better US growth outlook and more hawkish Fed expectations, then this is consistent with JPY underperformance, and rate differentials explain most of the recent JPY weakening. “We still see risk of even less Yen strength if the Fed continues hiking or the BoJ keeps policy unchanged for longer than we expect, both of which we think currently look like a closer call than a US recession,” they said.
Global investors usually flock to a country’s currency where a central bank is raising rates, in the hope of a higher yield on their investments, thus shunning currencies (like the yen) where rates are still very low.