Is Japan's involvement in the yen's devaluation a futile war?

Is Japan’s involvement in the yen’s devaluation a futile war?

For the first time in 23 years, the Japanese government and the Bank of Japan started an exchange rate intervention program on September 22. The “heirloom knife” was taken out to stop the yen’s value from falling. The exchange rate of the yen to the US dollar on the foreign exchange market quickly increased from the lower end of the range of 1 US dollar to 145 yen to about 140 yen. Back below the market’s anticipated “145 yen line of defense,” many people are raising concerns about how long the intervention effect will last. The scale of the intervention is trillions of yen, according to pertinent sources.

approximately 5:00 PM Japan Time (4:00 pm Beijing time). The yen exchange rate, which was about 145.70 yen, increased by more than 1 yen right away. When Bank of Japan President Haruhiko Kuroda gave a press conference, everyone anticipated that the yen would weaken to around 146 yen, but instead, the depreciation accelerated.

Speculative funds that have been selling the yen are the target of this counterattack, according to a Japanese bank official who expressed surprise at the intervention’s impact on the price, which has now been pushed back to about 140 yen.

The Bank of Japan implemented a “rate check” on September 14 that inquired about the level of the exchange rate at about 144 yen. The market thought that the government and Bank of Japan had a 145 yen defense line, but the majority of opinions thought that it was just a verbal intervention. The intervention to purchase the yen is constrained by a number of factors, which is why.

According to Yujiro Goto of Nomura Securities, the primary obstacle is “the conflict between the Bank of Japan’s monetary easing and the intervention of buying yen.” It seems contradictory to buy yen to intervene while maintaining monetary easing and fostering an environment conducive to yen depreciation.

The Bank of Japan insists on monetary easing and places a high value on economic support. As a result, the yen has declined to intolerable levels, forcing the Japanese government to act alone without consulting other governments. Its impact will be minimal because there won’t be any monetary tightening along with it.

There is also the issue of the intervention’s necessary funding. “The intervention of buying yen has a special problem, and the intervention this time is quite unexpected.” Sakakihara, a former Japanese financial officer who used to buy and sell dollars and yen around 1998, this time purchased the Japanese government. After the intervention, the yen stated as much.

The Japanese government will use its foreign exchange reserves, which are dollars and U.S. government bonds, as the basis for buying and selling dollars and yen. The maximum amount of intervention that can be carried out becomes the amount of foreign exchange reserves. Unlike the sell-yen intervention, which could theoretically intervene indefinitely, this is not the case.

At the end of August, Japan’s foreign exchange reserves were estimated to be around $1.29 trillion, which appeared to be sufficient. The average trading volume in Japan’s foreign exchange market, however, is about $370 billion per trading day, according to a Bank for International Settlements (BIS) survey conducted in April 2019. Despite the fact that this takes into account the volume of transactions involving currencies other than the US dollar, a quick calculation reveals that Japan’s foreign exchange reserves only cover three days’ worth of transactions.

Tohide Kiuchi of the Nomura Research Institute holds that “there is no sustainable effect” and that “foreign exchange reserves cannot be fully used in reality.”

It is likely that the offensive and defensive use of speculative money will last for a very long time. Speculative funds sell the yen on the grounds that its decline is consistent with the fundamentals of the global economy.

The average long-term interest rate in the United States has increased by about 2% just this year. On the other hand, the Bank of Japan adopted a monetary policy in Japan that uses 0.25% of the long-term interest rate as a “ceiling,” and the difference between the interest rates in Japan and the US is growing.

“If the government artificially prevents the depreciation of the yen with clear reasons such as widening interest rate differentials and trade deficits, speculative funds will easily seize the relevant contradictions,” according to Ryo Sasaki of JPMorgan Chase Bank.

Previous interventions have only had a modest impact. When the yen’s depreciation accelerated in 1998, the Japanese government intervened by purchasing yen and selling dollars in April and June. However, the yen’s depreciation trend ended in August when Russia went through a financial crisis, and its attempt to alter the trend of the exchange rate failed.

The largest business organization in Japan, “Keidanren,” led by Masakazu Tokura, stated on the 22nd that it “shows that it will not ignore the violent fluctuations of the (exchange rate), which is meaningful.” The Japanese industry has praised the intervention because the sudden changes in the exchange rate will make it challenging for businesses to create business plans. Foreign hedge funds, however, asserted that “loopholes are easier to catch the more contradictory and irrational actions are.” The Japanese government may be in a long-term “quagmire” because it has actually adopted the most extreme form of exchange rate intervention.

“If the government artificially prevents the depreciation of the yen with clear reasons such as widening interest rate differentials and trade deficits, speculative funds will easily seize the relevant contradictions,” according to Ryo Sasaki of JPMorgan Chase Bank.

Previous interventions have only had a modest impact. When the yen’s depreciation accelerated in 1998, the Japanese government intervened by purchasing yen and selling dollars in April and June. However, the yen’s depreciation trend ended in August when Russia went through a financial crisis, and its attempt to alter the trend of the exchange rate failed.

The largest business organization in Japan, “Keidanren,” led by Masakazu Tokura, stated on the 22nd that it “shows that it will not ignore the violent fluctuations of the (exchange rate), which is meaningful.” The Japanese industry has praised the intervention because the sudden changes in the exchange rate will make it challenging for businesses to create business plans. Foreign hedge funds, however, asserted that “loopholes are easier to catch the more contradictory and irrational actions are.” The Japanese government may be in a long-term “quagmire” because it has actually adopted the most extreme form of exchange rate intervention.

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