The Japanese yen fell to its lowest level against the US dollar in more than 10 months on Monday, sparking concerns that the Bank of Japan (BOJ) might intervene in the currency market to stem the slide. The yen dropped to 148.49 per dollar, nearing the 150 mark that some analysts see as a potential trigger for intervention. The BOJ and its governor, Kazuo Ueda, have repeatedly signaled that they are not ready to tighten monetary policy anytime soon, despite rising inflation and economic recovery in Japan.
BOJ maintains ultra-loose stance
The BOJ kept its policy rate at -0.1% and its target for 10-year government bond yields at around 0% on Friday, as widely expected. The central bank also maintained its massive asset purchase program and its forward guidance that interest rates will remain at current or lower levels until inflation exceeds 2% for a sustained period. Governor Ueda said the BOJ needs more time to assess the impact of the coronavirus pandemic and the global economic outlook before considering any policy change.
The BOJ’s dovish stance contrasted with the Federal Reserve’s hawkish tone last week, when it signaled that it could start tapering its bond-buying program as soon as November and raise interest rates three times next year. The Fed’s projections reflected its confidence in the US economic recovery and its concern about high inflation. The divergence in monetary policy expectations between the two central banks has widened the interest rate gap between the US and Japan, making the dollar more attractive than the yen for investors.
Yen under pressure from multiple factors
The yen’s weakness is not only driven by the monetary policy divergence, but also by other factors such as Japan’s political uncertainty, China’s economic slowdown, and global risk appetite. Japan is set to elect a new prime minister on Wednesday, after Yoshihide Suga announced his resignation last month. The frontrunner is Fumio Kishida, a former foreign minister who has pledged to continue Suga’s fiscal and monetary stimulus policies. However, some analysts doubt his ability to implement his agenda and deal with the challenges posed by the pandemic and China’s rise.
China’s economy has been hit by a series of shocks in recent months, including a resurgence of Covid-19 cases, a crackdown on the tech sector, a power shortage, and a debt crisis at property giant Evergrande. China is Japan’s largest trading partner and a major source of demand for its exports. A slowdown in China could weigh on Japan’s growth prospects and hurt its corporate earnings. The yen is often seen as a safe-haven currency that benefits from geopolitical tensions and market turmoil, but it has failed to capitalize on China’s woes.
Global risk appetite has also been supportive of the dollar and detrimental to the yen. The US stock market has rebounded from its September slump, boosted by hopes of a fiscal stimulus package and progress on raising the debt ceiling. The easing of fears over Evergrande’s default risk and the Fed’s tapering timeline has also improved investor sentiment. The dollar tends to benefit from higher risk appetite as it is used as a funding currency for carry trades, while the yen suffers from capital outflows as investors seek higher returns elsewhere.
Intervention risk looms over yen
The sharp decline in the yen has raised speculation that the BOJ might intervene in the currency market to prevent further depreciation. The BOJ has not intervened since 2011, when it sold yen to curb its appreciation after a devastating earthquake and tsunami. However, some analysts believe that the BOJ might be tempted to act if the yen breaks below 150 per dollar, a level that could hurt Japan’s export competitiveness and inflation target.
The BOJ has not commented on the recent exchange rate movements, but it has warned in the past that it would take appropriate action if necessary to ensure smooth market functioning and price stability. Governor Ueda has also said that exchange rates should reflect economic fundamentals and not be influenced by speculative forces. The BOJ might also seek coordination with other major central banks, especially the US Treasury, which has expressed understanding of Japan’s intervention concerns in the past.
However, other analysts doubt that the BOJ would intervene anytime soon, given the limited effectiveness and potential backlash of such a move. They argue that the yen’s weakness is justified by the economic fundamentals and market forces, and that intervention would only have a temporary impact unless it is backed by a change in monetary policy stance. They also point out that intervention could invite criticism from other countries that accuse Japan of manipulating its currency for trade advantage.
