What would Japan’s currency intervention to combat a weak yen look like? -Breaking
By Leika Kihara and Tetsushi Kajimoto
TOKYO (Reuters), – Japan’s government and central bank expressed concern about the recent sharp decline in the yen and are ready to address any issues regarding currency policy.
In a joint statement, the Financial Services Agency, BOJ, and Ministry of Finance stated that they had seen sharp declines in the yen and were concerned by recent moves in currency markets.
Officials of all three institutions rarely issue a joint statement that includes explicit warnings regarding currency movement.
A day after hitting a 20-year low against USD and a 7-year low against euro, the latest jaw-boning was made on concerns that the Bank of Japan (BOJ), will continue to fall behind major central banks in its exiting of stimulus policy.
Since March, the yen has fallen 15% against the U.S. Dollar and reached a 20-year low of 134.55 last week.
Shunichi Suzuki, the Japanese Finance Minister, did not comment on Friday’s possibility of intervention by the government in the foreign currency market to curb weakness. However, he continued his warning about rapid fluctuations.
Japan can use a variety of options, other than verbal intervention to stop excessive yen falling. There are several options. One is to intervene directly in the currency markets and purchase large amounts of Japanese yen.
We have provided details below on the possible outcomes of yen buying intervention, as well as some challenges.
WHAT YEAR DID JAPAN FINALLY CONDUCT A YEN-BUYING INTEVENTION?
Japan is heavily dependent on exports so it has traditionally focused its efforts on stopping sharp yen increases and not taking any action on falling yen.
Interventions to buy yen have been rare. Japan last intervened to help its currency in 1998 after the Asian financial crises triggered a sharp capital flight and a yen sale. In 1991-1992, Tokyo intervened in order to stop yen falling.
WHAT WOULD COMMUNICATE TOKYO TO BUY THE YEN AGAINST?
Intervention in currency is very costly. It could also fail if it’s not possible to influence its value on the large global foreign exchange market.
It is considered a last resort move. Tokyo would approve it only if there is no verbal intervention to stop the yen from falling. In deciding when and how to intervene, authorities will consider not just the level but also the rate of yen’s decline.
Intervention would not be possible if Japan experiences a triple selling of its yen, stocks, and bonds. This would mirror the sharp capital outflows seen in other emerging countries.
HOW DOES IT WORK?
Japan may intervene in order to curb yen increases. The Ministry of Finance will issue short-term bills to increase yen that can be sold on the Japanese exchange to lower the currency’s value.
To intervene to prevent yen falling, the authorities would need to tap Japan’s foreign reserve for dollars in order to trade in the currency for yen.
The final order of intervention will be issued by the finance minister in both instances. As an agent, the Bank of Japan will execute the order on the market.
What are the challenges?
It is harder to buy yen than selling yen.
Japan will need to tap its foreign reserves in order to sell dollars on the markets for yen.
This means that it cannot keep intervening for too long, as opposed to yen-selling interventions – in which Tokyo can issue bills to increase yen.
Japan has $1.33 trillion in foreign reserves, which is second only to China. Most likely it’s made up of dollars. If huge amounts are needed to change rates every time Tokyo intervenes, even though they may be plentiful, these reserves can quickly diminish.
In order to conduct currency intervention against the dollar/yen it will also need the informal consent of Japan’s G7 counterparts. It isn’t easy, as Washington was opposed to any currency intervention except for extreme market volatility.