Beleaguered economy could stymie Japan's efforts to buoy the yen

There seems to be no end to the Japanese yen’s freefall. The yen-dollar exchange rate soared to a 38-year high of 162 yen this past March. As of Thursday, it was still hovering slightly below 162 yen in the 161.5-161.9 range. Forex experts say there is a high chance of the yen falling even further. They contend that the Japanese economy’s baseline has fallen, and that intervention by monetary or forex authorities will be difficult. These could prove to be historic times, where the yen writes a new monetary narrative every day. 

The yen-dollar exchange rate on the Foreign Exchange Market in Tokyo was 161.38 yen (according to Yonhap Infomax) at 4 pm on Thursday, compared to the closing price of 161.68 on the previous day. On Wednesday, the yen climbed as high as 162 to the dollar, so the price has gone down a tad, but it remained at 161 or above for five consecutive days starting June 28. An exchange rate of 160 yen per dollar has historically been the psychological support level among market participants.

The yen plummeting is the result of various internal and external factors converging at once. For starters, the US dollar, a traditional comparative standard, has recently shown structural strength. Predictions about Donald Trump returning to office have sparked a rise in interest rates on government bonds. This has led to a surge in purchases of US dollars in global capital markets. Overall fragility in the Japanese economy has exacerbated the yen's weakness against the dollar.

The Japanese economy entered a state of negative growth in the first quarter of 2024 (-0.5% compared to the previous quarter, calculated according to GDP), while the rate of increase in the consumer price index is hovering around 2.6%-2.9%. In short, the macroeconomic situation makes it difficult for Japanese monetary authorities to raise the policy interest rate in an attempt to prevent excessive yen outflows. 

Japan’s policy interest rate crawled out of the minus zone this past March, but it still remains at 0.1%, which is effectively zero. Global investment data firm Investing.com diagnosed on Tuesday that “there’s little macroeconomic evidence to support a deeper rebound in the USD/JPY pair.”

A more fundamental issue is that long-term stagnation in the Japanese economy has made it difficult for the Bank of Japan to accelerate austerity measures to combat the yen’s decline. The general market consensus is that the yen will continue to lose value until the US Fed lowers its policy interest rate. In short, there is no reason to expect a major form of state or monetary intervention anytime soon. 

In a recently published report, the Korea Center for International Finance observed that “Recent movements in the Japanese yen, compared to April and May, exhibit low volatility and a tendency to move in one direction.” 

“Due to a commitment Tokyo made to the G7 countries to hold off on monetary intervention, Japan has little pretext for a major intervention, unless a truly chaotic situation arises,” the report continued. 

Regardless of such factors, some analysts say that Japan has limited capacity to conduct an intervention. US investment bank Citibank estimates that Japan’s ammunition for defending the yen in the forex market stands between US$200 and 300 billion. 

Japan already pulled from its forex reserves to conduct an intervention during the sharp increases in the yen-dollar exchange rate in April and May, resulting in a decrease of US$60 billion. Japan’s forex reserves now stand at around US$1.23 trillion. Citibank considers anything less than US$1 trillion “dangerous.” If Japan dumps its holdings of US government bonds to finance its intervention, this will trigger a rise in US government bonds’ interest rates, which could lead to a rift in US-Japan relations. 

This is likely why the Bank of Japan has stuck to verbal interventions thus far. Japanese Finance Minister Shunichi Suzuki has announced, “We are concerned about the sharp and unilateral movements in exchange rates, and will respond accordingly to drastic forex movements.” Japan has recently reshuffled the leadership of its forex and international finance authorities. This sends a message to markets that Japan is not going to idly sit by as the yen plummets. 

Yet the message seems to have had no effect on the market. 

Investing.com comments: “Adding to the yen’s woes, remarks from Japanese government officials hinting at potential currency interventions haven’t had any effect on the currency. Historically, such intervention attempts have proven ineffective, offering only temporary relief for the yen.”

The Korea Center for International Finance wrote in its report, “Despite repeated verbal intervention, Japan’s forex authorities are refusing to offer an official opinion on whether movements in exchange rates are excessive.” 

By Cho Kye-wan, staff reporter

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