Japan’s former forex chief says intervention an option for overly weak yen

JAPAN’S former currency chief said intervention is among the options to address an excessively weak yen, speaking ahead of US inflation data that may nudge the yen past a level closely watched by market players.

“I strongly feel the yen’s recent weakness has gone too far,” Takehiko Nakao, former vice-minister for international affairs at the finance ministry, said in an interview Wednesday (Apr 10).

“Intervention in the currency market is one option that can help address the situation,” said Nakao, who now chairs Mizuho Research & Technologies. “Currency intervention is effective in deterring speculation.”

The yen has largely been trading in the 151 range against the US dollar since Japan’s central bank raised interest rates last month, for the first time since 2007.

While a hike would normally support the currency, investors appear to be focusing more on the continuing large gap between Japanese and US rates, the likelihood that the Bank of Japan (BOJ) will not raise rates aggressively and receding Federal Reserve rate-cutting expectations.

“Given the BOJ has stated it will basically keep policy easy, developments in the US are more likely to trigger currency fluctuations,” said Nakao. He flagged that US economic indicators, including the consumer price index due later Wednesday, can have more impact on the exchange rate than Japanese data.

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The yen has come within a whisker of the 152 mark several times since last month, hitting a 34-year low of 151.97 on Mar 27.

That’s already above the 151.95 mark that prompted Japan to intervene in the currency market in October 2022. Tokyo spent more than US$60 billion on propping up the currency in three forays that year, before the yen strengthened beyond 130 in early 2023.

Some yen traders are seeing 152 as a line in the sand for Japan’s finance ministry, even though officials have repeatedly said they are not defending specific levels.

“The 152 yen mark may be functioning as a defensive line, but intervention can happen at any time,” said Nakao, referring to perceptions in the market.

Currency officials have warned that they are prepared to take bold action against excessive speculative moves in the market. Those comments have raised the question of what a sharp move would be.

Currency top official Masato Kanda has described a 10-yen drop in the yen over a month as “a very sharp move,” and a 4 per cent drop in about two weeks as “far from gradual.” Applying this logic now would place 157 yen or 158 yen as potential thresholds to watch.

Nakao indicated that those levels were off the mark. He suggested the definition of rapid moves should be much broader.

“If there is some movement seen as excessive, there’s a good chance the government will intervene in the market given the accumulation of excessive yen depreciation we’ve had up to this point,” he said.

Nakao suggested the entrenched weakness of the yen has caused a growing divide between haves and have-nots within Japan. While businesses with an overseas focus and wealthy individuals have benefited from the historic weakness of the yen, consumers and smaller firms have been suffering from inflation driven by rising import costs.

He suggested further normalisation of BOJ policy could help correct irregularities in the market such as the extreme depreciation of the yen and soaring stock prices.

“Depending on currency movements, it’s possible the BOJ will proceed with interest rate hikes at a speedier pace,” Nakao said. BLOOMBERG