The yen’s slide to a seven-month low against the dollar and a 15-year low against the euro has reignited interest in Japanese policymakers’ remarks on foreign exchange amid renewed concern they may consider stepping into the market to prop up the nation’s currency.
(Bloomberg) — The yen’s slide to a seven-month low against the dollar and a 15-year low against the euro has reignited interest in Japanese policymakers’ remarks on foreign exchange amid renewed concern they may consider stepping into the market to prop up the nation’s currency.
Japan spent around $62 billion intervening in markets last year to support the yen, but senior officials’ comments have yet to hint at imminent action so far this year.
In late May, government officials from the Bank of Japan, Ministry of Finance and Financial Services Agency convened to discuss topics including the currency, an unscheduled meeting often viewed as an initial show of heightened concern.
Since then Japanese Finance Minister Shunichi Suzuki and chief currency official Masato Kanda have said the currency should reflect economic fundamentals and warned that they will take appropriate action if necessary, comments that sound an alarm but fall short of signaling an impending move.
But given the still divergent policies of the Bank of Japan and the Federal Reserve, the yen could weaken further, leaving investors at risk of “bold action” from Japanese authorities. Last week’s central bank decisions prompted more softness in the yen to leave the currency hovering around 141.7 yen to the dollar as of Thursday morning, with Fed Chairman Jerome Powell again signaling the likelihood of two more US rate hikes to come.
Last year Japan intervened when the yen was rapidly heading toward 146 after a BOJ meeting on Sept. 22. It followed up with further yen buying on Oct. 21 when the currency was fast approaching 152.
Still, the US last week dropped Japan from its monitoring list of trading partners whose currency practices and macroeconomic policies should be closely watched.
The Treasury deemed Tokyo’s entry into markets in 2022 fell short of its 2% of gross domestic product condition for persistent one-sided intervention. That doesn’t equate to a US green light for further market forays by Japan, but it does give a broad indication of at least one red line.
Here is an updated guide on how to decode the language used by policymakers before possible interventions.
When volatility is slight
Officials will typically decline to comment.
When volatility persists
- “Stability in the foreign exchange market is important.”
- “It’s desirable for exchange rates to reflect Japan’s economic fundamentals.”
- “We continue to monitor the foreign exchange market’s impact on the economy.”
When monitoring increases
- “We are watching/monitoring developments in currency markets.”
- “We are carefully watching developments in currency markets.”
- “We are watching exchange rates closely/with great interest.”
When concern rises
- “Sudden/abrupt/rapid movements in exchange rates are undesirable.”
- “Currency markets that aren’t reflecting economic fundamentals are undesirable.”
- “We will monitor markets with vigilance.”
- “Excessive movements in exchange rates have bad/harmful effects on the economy.”
When concern becomes discomfort
- “Exchange rates aren’t reflecting economic fundamentals.”
- “The yen is weakening rapidly.”
- “Yen gains/declines have been excessive/one-sided.”
When it’s time for a warning
- “We can’t tolerate speculative moves.”
- “We will take appropriate action if needed.”
- “Clearly,” “fairly” and “very” are used to describe rapid movements of exchange rates.
When intervention becomes a possibility
- “We won’t rule out any options/means to combat excessive movements.”
- “We’re ready to take decisive/bold action to counter excessive/speculative moves.”
- “We’re ready to take action at any time.”
- “Fine to consider us on standby.”
- “We could conduct stealth intervention.”
Last September, the government stepped into markets two weeks after chief currency official Kanda said he wouldn’t rule out any options. The BOJ, operating on behalf of the finance ministry, conducted a rate check of currency prices, another high-level warning for traders, one week before taking action.
In October, Kanda said he was ready to take bold action one week before intervening. On both occasions the currency had moved by more than two yen against the dollar in less than a day.
–With assistance from Emi Urabe.
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