By Leika Kihara and Tetsushi Kajimoto

TOKYO, Reuters – Japanese policymakers have increased their concerns about sharp yen falls. The finance minister said that the decline in the yen to two decades ago compared with the dollar would hurt the economy and push up living expenses at a time when wage growth is slow.

Haruhiko Kuroda (Bank of Japan Governor) is a strong advocate for a weaker currency. He also admitted that sharp declines in the yen could cause economic problems by making it more difficult for businesses to plan their business.

Shunichi Suzuki is the Finance Minister and he has pledged to work closely with the United States regarding currencies. This week, he will be traveling to Washington to meet U.S. Treasury secretary Janet Yellen. They are scheduled to do so on the sidelines of a gathering of financial leaders representing the Group of 20 economic powers.

Japan offers several ways to prevent excessive yen drops, apart from verbal intervention. One option is to buy large quantities of yen and directly intervene on the currency market.

Here are some details about how the yen-buying intervention might work and what challenges it may face.

WHEN WAS JAPAN’S LAST YENBUYING INTERVENTION CONDUCTED?

Japan’s dependence on exports has meant that it has always been focused on curbing sharp rises in the yen and taking a cautious approach to yen drops.

Rarely has Japan intervened to purchase yen. Japan has not intervened in support of its currency since 1998 when it was hit by the Asian financial crisis. This triggered a sell-off and rapid capital flight from the region. In 1991-1992, Tokyo intervened in order to stop yen falling.

What would prompt TOKYO to BUY YEN AGAIN

The difficulty in influencing the value of currency intervention on the vast global forex market is expensive and can easily lead to its failure.

This is why it’s considered an emergency move. Tokyo would only approve the plan if verbal intervention is not enough to stop a free falling of the yen. In deciding when and how to intervene, authorities will consider not just the level but also the rate of yen’s decline.

Former chief currency diplomat Eisuke Sachakibara stated to Reuters that a yen decline below 130 per dollar could signal intervention.

According to some policymakers, intervention is only possible in Japan if there’s a threefold selling of the yen, bonds and stocks. It would also be similar in scale to capital outflows in emerging economies.

WHAT WORKS IT?

Japan can intervene to stop yen risings by issuing short-term bills that it can sell on the Japanese market.

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. Bank of Japan acts as agent for the Market and will implement the Order.

WHAT ARE THE RESPONSIBILITIES?

Interventions in yen-buying are more complicated than those that involve yen selling.

Japan will need to tap its foreign reserves in order to sell dollars on the markets for yen.

It means it has limits on how long it can intervene, not like for yen selling intervention. Tokyo cannot continue issuing bills in order to raise the yen.

Japan had $1.356 trillion in foreign reserves, making it second after China. Most likely the reserve was made up of dollars. The size of Japan’s foreign reserves is not insignificant, but it could shrink quickly if large sums are needed to change rates every time Tokyo intervenes.

In order to conduct currency intervention against the dollar/yen it will also need the informal consent of Japan’s G7 counterparts. This is difficult because Washington has always been opposed to currency intervention.