Japan’s apparent back-to-back forays in the currency market last week highlight the difficulty of timing moves to keep traders on guard without diminishing the effectiveness of intervention.
Authorities had the element of surprise on Thursday last week with a suspected ￥3.5 trillion (US$22.4 billion) move during a period of low volatility as the yen strengthened against the US dollar following soft US economic data.
While that generated a quick ￥4 appreciation in the currency against the US dollar, the gain began to steadily fade, until a follow-up move on Friday estimated at about ￥2.1 trillion. Yet this second apparent action nudged the currency by just ￥1.5.
Photo: Bloomberg
It is a dilemma for Japanese Vice Minister of Finance for International Affairs Masato Kanda, who has to find fresh ways to keep speculators on the back foot as authorities look to buy time ahead of monetary policy meetings by the Bank of Japan (BOJ) and the US Federal Reserve later this month.
“Kanda has widened the scope of wariness in the market by acting when a move can be effective rather than responding to volatility, but it doesn’t seem like the yen strengthened by much on July 12, given the ￥2.1 trillion scale of the move,” Sony Financial Group Inc senior analyst Kumiko Ishikawa said.
The yen was 0.6 percent stronger in early European trading yesterday, at about the ￥157.50 per US dollar level.
Japan’s policymakers are still wrestling with the central problem of balancing a desire to firmly establish a healthy inflation trend in an economy with the need to stem falls in the currency that are fueling inflation and dissatisfaction among voters and small businesses.
If the BOJ raises interest rates at a faster pace, it would offer support for the yen, but could at the same time derail attempts to forge a cycle of rising wages, prices and growth.
That leaves the central bank in a tight spot further complicated by its decision last month to wait until this month before announcing plans to pare back its buying of government bonds.
Japanese Minister for Digital Transformation Kono Taro, a former candidate for leadership of the ruling party, said the central bank should simply raise rates to support the currency.
“The currency is a problem for Japan,” Kono said, speaking with Bloomberg TV yesterday. “The yen is too cheap and we need to bring it back.”
Kono, who has long said he aims to eventually become prime minister, deflected a question on the possibility of launching his own bid to replace Japanese Prime Minister Fumio Kishida at an election for the presidency of the ruling Liberal Democratic Party in September.
While a majority of surveyed economists do not expect a rate hike at the conclusion of the central bank’s two-day meeting on July 31, no rate change might trigger renewed falls in the yen.
A more aggressive paring back of bond purchases might help the yen at the risk of looking too aggressive for some market participants.
Economists point out that it is almost impossible for the meeting to satisfy everyone.
“It’s a tough call for the BOJ,” NLI Research Institute senior economist Tsuyoshi Ueno said. “My base case is no rate hike this time, but I’m not ruling out that chance.”
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