Japan’s Monetary Policy: Can Intervention Alone Keep Shoring Up the Yen?

By Yumi Teso, Senior Advisor, Financial Services Industry | October 10, 2022

Photo by Jezael Melgoza on Unsplash

Japan intervened in the foreign-exchange market in late September to buy its currency for the first time since 1998 after its weakening yen hit a 24-year low. The intervention immediately lifted the yen by around 2% against the U.S. dollar.

At about the same time, however, the Bank of Japan (BOJ) decided to keep interest rates at ultra-low to support the nation’s fragile economic recovery. The BOJ’s key short-term rate was kept at -0.1%.

Meanwhile, across the Pacific, the U.S. Federal Reserve has already delivered its third straight 0.75-percentage-point interest rate increase in September to combat against inflation that is near 40-year highs. The increase brought the benchmark federal-funds rate to a range between 3% and 3.25% last month: the most rapid pace of increases since the 1980s.  Fed officials have hinted they are prepared to make a fourth increase of another 75 basis points in November amid a strong labor market and heightened inflation.

Can the Japanese government keep shoring up the yen without a shift in the overall monetary policy by the BOJ? The dollar’s broad strength is partly attributable to the Federal Reserve’s interest-rate increases.

As of October 7, the yen stood at close to its pre-intervention level. The Japanese government continues to send signals that it will take steps in the currency market if the excessive moves in the currency persist. Finance Minister Shunichi Suzuki said, “we intervened the other day and we have said it we would take decisive steps as needed. There’s no doubt this has guarded against speculative moves.’’

A stronger local currency also has its pros and cons. A stronger dollar may help to tame inflation in the U.S. by making their imports cheaper, but it would hurt profits of multinational corporations. Salesforce CEO Marc Benioff was quoted as saying that they had a great quarter but the dollar had an even strong quarter, adding that in this fiscal year, a strong dollar is likely to cost the company more than $800 million. A strong dollar also means that overseas sales revenue become less in the dollar term when repatriated.

Although the BOJ sees the current excessive weakness of the yen is not desirable, it is also being cautious of the impact of the sharp increase in the yen and its impact on inflation. The annual inflation rate in Japan rose to 3.0% in August 2022, the highest level since September 2014 and higher than the BOJ’s inflation target of 2.0%, on the back of rising prices of food and raw materials as well as yen weakness. Going forward, Governor Haruhiko Kuroda said that he would not hesitate to ease monetary policy if the economy and prices stagnate.

The currency intervention alone is unlikely to prop up the yen for the long-term. There must be an alignment with other monetary policy tools, including policy bias toward the benchmark interest rate, money supply and asset-buying programs, among others. And still, there are uncontrollable forces which will have an impact on the exchange rates, from rising tension between Ukraine and Russia, and Taiwan and China, to missile testing by North Korea.