“All options are on the table”

Today (9/6) in the Tokyo Foreign Exchange Market, the dollar-yen exchange rate briefly hit the 147.5-148.0 yen range against the U.S. dollar, with the yen depreciating further relative to the stronger dollar. This marked the most significant depreciation of the yen for the year to date. What happened was that Saudi Arabia had announced that it was extending its voluntary production cuts to December, prompting a substantial rise in the price of crude oil. In response, long-term U.S. Treasury yields also went up, leading to the exchange rate situation I just described.

Incidentally, roughly one year ago on September 22, the Bank of Japan decided at the Monetary Policy Meeting to stay the course with its monetary policy, which led the dollar-yen exchange rate to hit 1USD/145.90JPY, a 23-year low. When that happened, the government embarked on a yen purchasing intervention, the first of its kind in 24 years since June 1998.

Vice Minister of Finance for International Affairs Masato Kanda spoke today about the yen’s recent depreciation trend, referring to it as a “sudden fluctuation”, “speculative behavior”, and so forth, and remarking that “the government intends to take the appropriate measures, and all options are on the table”. His comment that “all options are on the table” has the ring of a strong expression chosen to get a tight rein on the markets.

In the process leading up to last year’s foreign exchange intervention, Mr. Kanda also commented on September 14 of that year that the government would “take the appropriate measures, with all options on the table”, using the same sort of phrasing to check the depreciation of the yen in the exchange market. The dollar-yen rate at that time was in the 144.5-145.0 yen range. The government actually stepped in with its foreign exchange intervention precisely one week later.

A Bank of Japan “rate check” is also in the spotlight

On that same day last year (9/14), there was one other major event besides the remarks made by Vice Minister Kanda. The Bank of Japan implemented a “rate check”, asking market participants for an exchange rate level in order to lay the groundwork for a foreign exchange intervention.

This rate check is normally something done at the time that the Ministry of Finance decides to make a foreign exchange intervention, just before that intervention is carried out by the Bank of Japan per the Ministry’s request. Last year, however, even though the rate check was implemented, the foreign exchange intervention was not made right away. Accordingly, this most recent rate check had nothing to do with the practical business of a foreign exchange intervention—it was done with the aim of reining in the market. It’s not clear whether the Bank of Japan did this at its own discretion, or instead did it at the government’s request.

Either way, if in addition to Vice Minister Kanda’s remarks the Bank of Japan does go through with implementing another rate check, it would create a situation identical to the one seen a week prior to the foreign exchange intervention last year, and we might well consider it a clear sign that a foreign exchange intervention is coming soon.

Public dissatisfaction with yen depreciation and high prices on the rise once again

While it doesn’t seem that the U.S. and other major powers welcome a foreign exchange intervention by Japan, the reason that the government nevertheless embarked on such an intervention last year was the Japanese public’s growing dissatisfaction with how the ongoing depreciation of the yen was promoting a rise in prices.

High inflation vastly outstripping the pace of wage growth has persisted this year as well, and it appears that public anxieties over the continued weakening of the yen, along with people’s criticism over the Bank of Japan’s easy money stance (also a factor behind that depreciation), are once again on the rise. These aspects of the economic environment have come to resemble those seen at the time of last year’s foreign exchange intervention.

Last year, the Japanese government also made a foreign exchange intervention in the U.S. market, but as this tends not to be well received by the U.S. authorities, the government might be thinking that it only wants to intervene in the Tokyo market to the extent possible. Moreover, it’s something of a pretense shared among major powers that foreign exchange interventions are not made with any specific exchange rate level in mind, but are merely a kind of smoothing operation meant to curb speculative and excessive market developments.

Given these points, perhaps the government will look to time its foreign exchange intervention to occur at the moment the yen suddenly depreciates by around 2 yen in a single day in the Tokyo market, for example.

Will the yen’s depreciation halt at around the 150.0-150.5 yen range?

That said, in actuality, the Japanese government does seem to have a specific foreign exchange rate level in mind. That would be about 1USD/150JPY, or in the range of 1USD/151JPY which was the level when the yen’s depreciation against the dollar peaked last year. If we take this level to be the de-facto defense line, then it’s conceivable that an intervention would be made before that line is reached.

If a foreign exchange intervention were to be implemented, the value of the yen might briefly appreciate versus the dollar by around two or three yen. However, as was the case last year, the effects of the foreign currency intervention would be transient, and would only amount to stalling. It’s truly a policy of “buying time”.

And also similar to last year, there is little chance that the Bank of Japan will respond to the yen’s depreciatory trend by undertaking policy revisions. Under such circumstances, what would really change this ongoing depreciation of the yen is probably if speculation started to emerge that the U.S. was headed for a recession and was going to embark on full-scale monetary easing. We should consider that this sort of change in economic and monetary conditions in the U.S. may happen in the not-so-distant future.

Given the foregoing, at this point in time we might well suppose that even if a foreign exchange intervention by the government won’t have any major effects, as long as the government is buying time, the yen’s depreciation against the dollar will be halted after reaching the range of 150.0-150.5 yen to the dollar.

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  Takahide Kiuchi

  Executive Economist