Will Japan intervene in the yen's depreciation?

Yen has appriciated against some major currencies

However, politicians and central bankers are largely passive observers because they have not intervened in the yen for over a decade and are unlikely to do so this time.

What is different this time is that the concern seems to be about yen weakness (although politicians tend to have a catch-all concern about any sort of yen volatility). Usually, it is excessive strength that causes Japanese politicians to start watching the yen. But should we take their implicit threats any more seriously if yen weakness is the concern rather than yen strength?

In one sense, Mr. Steve Barrow, Head of Standard Bank G10 Strategy argued that the answer to this is ‘yes’. The reason is that what matters to any official should not be the nominal value of the currency, but its real (inflation adjusted) value, as this is what determines international competitiveness. And in Japan, the real value of the yen has halved since its peak in 1995 and is currently at its lowest level since the mid-1970s. Hence, in the past, when Japanese officials have complained about the nominal strength of the yen, most often against the dollar, they have had the cushion of a weakening real yen rate thanks to Japan’s low inflation performance. Perhaps for this reason, the market has not taken such complaints about yen strength too seriously.

Of course, the longer the BoJ goes without backing up such concerns with intervention, the weaker the message gets. But now Suzuki’s concern seems to be that the nominal value of the yen is getting weaker. That could exacerbate real yen weakness and, should such weakness become problematic, possibly provoke at least verbal intervention. But we have to ask, what’s the problem with a weak yen in real or nominal terms? BoJ Governor Kuroda spoke before the holidays and noted that a weak yen might not be such a bad thing.

On inflation, for instance, Japan could still use higher prices as the CPI is still only 0.6%. If yen weakness lifts import prices, then that’s presumably a good thing, not a bad thing. In addition, Japan holds large amounts of foreign assets that it has accumulated with the proceeds of large current account surpluses over the years, and the value of these assets increases the weaker the yen becomes.

As a result, they are unlikely to frighten yen sellers.Perhaps the only sense in which the market might take note is if the yen becomes hugely volatile. If there is any consistency in the currency message from Japanese officials, it is that excessive volatility is bad, whether this comes in the shape of a rising or falling yen. But even here, we don’t think there is any reason for alarm. "We don’t doubt that some might think the yen is about to embark on a sustained bout of weakness (and higher volatility) against the dollar as the Fed hikes and the BoJ stands pat", Mr. Steve Barrow said.

However, in the 2015-2018 during Fed tightening cycle, the dollar/yen started the cycle at around 120 and finished it close to 110. In short, Fed hiking cycles don’t tend to lift the dollar/yen. Another point to consider is that yen volatility has been extremely low for some time now, with even the COVID spike proving to be limit ed and fleeting.As a result, the market won’t have much sympathy with any MoF or BoJ complaints at this stage. What’s more, volatility spikes are usually associated with yen strength, not weakness, as investors return in droves to ‘safe’ currencies like the yen and ditch carry trades when risk aversion surges. So, if Japanese officials are concerned by yen weakness right now, a dose of much higher volatility might conceivably ease these concerns should the yen revert to its usual pattern and appreciate.

"The bottom line, in our view, is that investors should not fret about policymakers’ warnings on the yen. This could leave the market to test the upside for the dollar/yen a bit more, to 120 for instance, but those anticipating a major dollar/yen rally on the back of Fed tightening are likely to be disappointed if history is anything to go by", Mr. Steve Barrow stressed.