TOKYO (Reuters) – Japan is suspected of intervening in the currency market several times this month to support the yen, underscoring its displeasure at the losses the currency’s devaluation is causing households due to more high-priced imports.
The authorities did not confirm whether they were intervening, but below is Tokyo’s intervention tactics and their potential implications for Japan’s monetary policy:
WHY DID THEY INTERVEN?
Before the suspected intervention, the yen was at a 38-year low of more than 160 per dollar, leaving policymakers increasingly concerned that higher import costs could hurt frail private consumption.
The frail yen is already weighing on Prime Minister Fumio Kishida’s ratings ahead of the ruling party leadership election expected in September.
Leaving the yen’s decline unchecked would risk giving markets the impression that Tokyo is turning a blind eye to speculative moves that are not in line with fundamentals.
WHAT’S DIFFERENT THIS TIME?
Unlike previous interventions, which typically occurred in the face of keen declines in the yen’s value, the suspected intervention on July 11 came as the dollar was already depreciating in response to frail U.S. inflation data.
This suggests Tokyo was trying to seize the moment when the market tide was already shifting in the yen’s favor. The growing prospects of a near-term U.S. rate cut would allow Japan to argue that further declines in the yen against the dollar do not reflect fundamentals and justify intervention.
Some analysts said the change in tactics may have been intended to keep markets guessing about when authorities might intervene again. Chief currency diplomat Masato Kanda said there was no set time period in which to judge whether the yen’s moves were excessive.
Media reports that Japan was imposing exchange rate controls on the euro-yen pair also worried markets, as Tokyo rarely intervenes against the common European currency.
WHERE IS THE LINE IN THE SAND?
Authorities say they don’t have specific levels in mind. But traders estimate that 160 yen to the dollar is Japan’s limit, which increases the chances of intervention.
For example, Tokyo spent 9.8 trillion yen ($62.7 billion) on currency intervention in slow April and early May after the Japanese currency hit a 34-year low of 160.245 per dollar on April 29.
The yen has since fallen to a 38-year low of 161.96 per dollar on July 3 before suspected intervention pushed it back below the 160 line last week.
WHAT ELSE COULD CAUSE MORE INTERVENTION?
Rising import costs stemming from a frail yen are threatening the administration’s efforts to boost inflation-adjusted wage growth and boost household purchasing power.
If public dissatisfaction with the impact of the frail yen on inflation grows, it could escalate political pressure on the authorities to take renewed action to stem the currency’s decline.
WILL TACTICS CHANGE UNDER NEW LEADERSHIP?
Incumbent currency diplomat Masato Kanda, who led massive yen-buying interventions in 2022 and 2024, is known for aggressively warning markets against devaluing the yen.
Kanda’s term ends in July. He will be succeeded by Atsushi Mimura, a veteran financial regulator whose views on currency policy are little known.
Japan’s exchange rate policy is likely to remain largely unchanged under the up-to-date currency chief. The style of communication may differ, however, with some diplomats tending to issue more explicit warnings to markets than others.
HOW COULD THE LATEST INTERVENTION AFFECT WAR POLICY?
Markets are divided on how Tokyo’s latest attempt to enter the market might impact the Bank of Japan’s decision to raise interest rates at its July 30-31 meeting.
The Bank of Japan may feel compelled to cooperate with the government in efforts to tardy the yen’s decline by implementing a double hawkish surprise of quantitative easing and an interest rate hike.
But doing so could give markets the impression that yen movements are key drivers of interest rate decisions. That’s something the BOJ wants to avoid because it would go against the central bank’s protocol not to utilize monetary policy as a tool to directly control currency movements.
Analysts say that if the latest intervention reverses the yen’s weakening trend in the market, it could give the Bank of Japan more flexibility in setting the timing of its next interest rate hike.
In Japan, the decision to intervene in the currency market is made by the Ministry of Finance, and its agent is the central bank.
(1 dollar = 156.3200 yen)
