The limits of yen intervention

Japan’s intervention in support of its currency has proved to be a little like the labours of Sisyphus. The Japanese Ministry of Finance is suspected by traders to have used $59bn to boost the yen from a historic intraday low of ¥160 to ¥153 to the dollar two weeks ago. But as of Wednesday, the Japanese yen is back to trading at around ¥156 per dollar, and it may slip further.

Like Sisyphus’s boulder rolling down the hill, the downward slide of the yen was entirely predictable. It highlights the general futility of unilateral currency intervention. The economic fundamentals that had boosted the dollar and dragged the yen down are still at play. Though the Bank of Japan’s March decision to end negative rates drew publicity, the rate was only raised to 0.1 per cent, and the Bank has been dovish regarding future rate hikes. With stronger than expected inflation pushing the Federal Reserve to keep US rates at 5.25 per cent for longer, swollen US yields mean the dollar is set to put pressure on the yen and other currencies until US rates come down. That makes one-sided price interventions pointless.

This is not the first time in recent memory that Japan has intervened in foreign exchange markets. The Ministry of Finance intervened three times in late 2022, spending a combined $58.7bn when the currency dipped below ¥150 to the dollar. The effects of those interventions, too, were only momentary. The strengthening of the yen over the following months was driven by a decline in US Treasury yields, not actions by Japan’s Ministry of Finance. 

Japan’s recent preference for a stronger yen is not surprising. Given its economy’s growing reliance on energy and food imports, a stronger yen boosts Japan’s purchasing power on the international market. It supports household savings, too, which are critical to Japan as its population ages and households become increasingly dependent on their coffers. The urge to support the currency may also stem from lingering fears from the run-up to the 2008 financial crisis. A stretch of yen weakness then hid underlying economic vulnerabilities, causing great pain when the global financial system faltered and the yen rose sharply. Politics are at play too, with prime minister Fumio Kishida and his government wary that economic instability is suppressing consumption and alarming the public.

Yet the focus on the strength of the yen may be misguided: for now, having a weaker currency has benefits. In March’s Bank of Japan meeting, the monetary policy committee exalted the return of a “virtuous inflationary cycle”, as rising wages appeared set to jump-start inflation after decades of price malaise. But Japanese inflation has since decelerated. As mentioned in last week’s BoJ monetary policy meeting, a weaker yen could quickly spur price growth, allowing the BoJ to achieve its inflation objective.

While Japan’s dissipation of $59bn shows that unilateral currency intervention is fruitless in the long term, the short-term efficacy of any intervention comes down to its objective. The yen occupies a unique place in the global market, as decades of ultra-loose monetary policy have made it the favoured vehicle for the “carry trade,” which in turn suppresses the yen. Given Japan’s large foreign reserves, a one-time intervention could be seen as a rational and affordable warning call by the Japanese government to currency traders to restrain their speculation.

But Japan should rest there. Until the fundamentals underlying the weak yen dissipate, burning more reserves just to send further signs to traders — who may in turn leverage future price interventions to their advantage — is likely to be a Sisyphean exercise.