Bank of Japan needs to be cautious about yen battles

Bank of Japan needs to be cautious about yen battles

Bank of Japan Governor Haruhiko Kuroda at a press conference in Tokyo, Japan, January 21, 2020. REUTERS/Kim Kyung-Hoon/File Photo

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HONG KONG, Sept. 15 (Reuters Breakingviews) — Wall Street’s recent troubles suggest that its stock markets have embraced the old “don’t fight the Fed” advice. However, a battle with the Bank of Japan has historically offered better odds. Tokyo called dealing desks this week to check prices, hinting that its central bank could intervene to stem the yen’s rapid fall against the dollar, Reuters and other sources told Reuters. Yen bears retreated but with the dollar rising around the world thanks to higher interest rates by the US Federal Reserve and traders betting on the same, the Bank of Japan will have to do more than just throw money into the currency markets to stem the decline.

With the yen close to a 24-year low of nearly 145 to the dollar, BOJ Governor Haruhiko Kuroda is hardly comforting to know that he is not alone in his concerns. The People’s Bank of China fixes the daily range of the yuan at a higher level than trading models predicted. In Seoul, which has an active history of intervention, officials have hinted that they may intervene soon.

Central bank intervention has been rare in recent years due to the G20’s general dislike of protectionist policies, although Japan tends to insist that erratic market movements deserve an exception. The Bank of Japan itself did not intervene since October 2011 after a globally coordinated intervention in the aftermath of the Fukushima nuclear disaster failed to stop the currency from strengthening, sending the dollar back to 75 yen. Yen weakness has not prompted intervention since the 1998 Asian financial crisis.

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If Japan is serious about reversing or at least slowing the currency’s weakening, it will need to do more than just buy the yen. A direct increase in the interest rate is extremely unlikely: even with inflation at the level seven year maximum 2.4%, Kuroda made it clear that he considers such pressure to be temporary. However, there are other movements available. A six-year yield curve control policy capped the cost of 10-year loans at 0.25%. Widening the allowed trading range or shifting focus to short-term rates would close the gap with US bond yields and help set a floor for the yen.

Next week, the Bank of Japan will conclude its policy meeting the day after the Fed’s own discussion. Surprisingly strong US inflation data this week added nearly half a percentage point to US peak rate forecasts. If Japan really wants to fight this kind of shift, it will take more than a few phone calls.

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CONTEXT NEWS

According to Reuters, the Bank of Japan on September 14 reconciled exchange rates with banks. Traders are taking the calls as a sign that the central bank is increasingly concerned about the sharp depreciation of the yen, which recently hit a 24-year low against the dollar at nearly 145 yen.

Japanese officials have recently stepped up their comments on the currency and hinted that actual intervention is possible.

The last time the Bank of Japan intervened was in October 2011, when the dollar was worth almost 75 yen.

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Edited by Anthony Curry and Thomas Schum

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