Japan should leave the yen bazooka at home

ROBERT Rubin, the former US Treasury secretary who added American firepower to the successful defence of the yen in the late 1990s, had some rules for foreign-exchange intervention.

Such moves needed to be very rare and ought to be startling. The more surprise, the better, because a market whose value has swollen to US$7.5 trillion a day could easily swamp such action.

As a former Goldman Sachs chief, Rubin also appreciated that currencies ultimately reflect the underlying conditions of an economy, relative to peers. Japan would do well to remember that as it debates how, and when, to battle a surging greenback.

Clear objectives

Governments do have agency, but the objectives need to be clear. Trying to induce a sustained rally in the yen is a non-starter as long as the gap in interest rates between the United States and Japan is so wide, with little prospect of a meaningful change for a considerable period.

What officials can do is manage the yen’s weakness, smooth out sharp drops, and make some gung-ho dealers think twice, at least on occasion. The more modest and plausible the ambition, the greater the chances of avoiding disappointment – and retaining credibility.

The yen’s big rally on Monday (Apr 29) after a hitting a 34-year low led traders to speculate that Tokyo had bought its own currency. If the state was behind the sharp bounce, authorities timed the move fairly well. With a public holiday in Japan, liquidity was thin, meaning moves can be exaggerated.

The Ministry of Finance (MOF) was coy about whether it was behind the action; when the government intervened in late 2022, there was a formal announcement.

Officials may be developing a new strategy based on a bit of subterfuge; keep dealers guessing about levels and tactics. A Bloomberg analysis of central bank accounts suggested that currency authorities staged the first intervention since 2022 on Monday.

Decades ago, Japan was a regular player in the market – sometimes daily, for long stretches.

At one point, the top international official at the finance ministry, Eisuke Sakakibara, came to be known as “Mr Yen”; so ubiquitous was his presence.

Reporters would wait for him in the car park or outside his home, and stalk the ministry corridors hoping to catch him between meetings. His comments – even something that might seem like a statement of the obvious, such as “we are monitoring the currency” – could carry weight.

Most of that early involvement was devoted to curbing yen gains, the opposite of what Tokyo today desires. Heavy buying continued for a while after Sakakibara moved on, but dissipated from mid-2000s, largely as a result of US pressure. Washington was spending a lot of time and energy trying to persuade China to loosen the reins on the yuan. 

In the contemporary era, MOF limits itself to cameo appearances, which means they matter. The current occupant of Sakakibara’s former chair is Masato Kanda. While he kept mum on Monday, Kanda has been clear about his feelings in recent weeks: speculative and extreme moves are undesirable and Japan reserves all options in dealing with them.

Late last month, he brandished a statement signed by himself, Treasury Secretary Janet Yellen and their South Korean counterpart that acknowledged a “sharp depreciation” in the yen and won and emphasised the “serious concerns” in Tokyo and Seoul. This suggested that Yellen wouldn’t be bothered by intervention from the two. 

The communique didn’t, contrary to some speculation, significantly boost the chances that the US will participate in any coordinated endeavour. The bar for doing so has historically been extremely high.

Rubin’s 1998 adventure stood out because it happened so seldom.

Two years later, his successor, Larry Summers, joined Europeans in putting a floor under the fledgling euro in what officials described as a one-time assist to longstanding allies. It also wasn’t in the interests of global financial stability for the common currency to unravel so soon after debut.

On its own

That means that Japan is on its own for now. No doubt 160 to the buck will be seen as a line in the sand.

The phrase is so worn that it’s eye-rolling. I remember when 98 was a line, then 100, 110, 120 and so on. There’s always a new threshold for displeasure.

Talk to senior economic officials privately and they stress that it’s not so much absolute levels that preoccupy them, more the pace at which levels are reached and breached. That makes the type of response critical. Smoothing swings and giving the economy some time to adjust to a weaker yen is the name of the game. 

The root cause of yen weakness lies in the US, not Japan. That makes the latter’s options very limited. Sovereignty goes only so far. Kanda and company need to pick their shots carefully, and with discretion. Never mind the bazooka. Just a few bullets will suffice.