"Limited Effect" Why Japan's 2024 Currency Intervention After 24 Years Faces Skepticism

[Image source=Reuters Yonhap News]

[Asia Economy Reporter Jeong Hyunjin] "Japan's historic intervention will not be able to prevent the pressure on the yen's value from falling."

On the 23rd, the Japanese government and the Bank of Japan (BOJ) intervened in the foreign exchange market by purchasing yen for the first time in 24 years to counter the yen's depreciation, but the market response was lukewarm. As major countries including the United States and emerging markets around the world accelerate monetary tightening, Japan continues to maintain its large-scale easing policy, making further depreciation of the yen inevitable.

◆ From 115 yen to 145 yen per dollar in 6 months... Why did they intervene?

Looking at the background of the Japanese foreign exchange authorities' intervention, the yen exchange rate has been on the rise since March. According to Bloomberg News, the dollar-yen exchange rate, which was in the 115 yen range in March, surged to the high 145 yen range on the 23rd. The U.S. Federal Reserve (Fed) began tightening monetary policy in March, implementing a series of large interest rate hikes, widening the interest rate gap with Japan, which continues its easing policy, strengthening the dollar and weakening the yen. Meanwhile, the dollar index, which measures the value of the dollar, surpassed 100 and rose to the 111 range.

Until now, the foreign exchange authorities had stated they would closely monitor the rapid depreciation of the yen. The point at which the previously silent Japanese Ministry of Finance and BOJ directly intervened was in the afternoon of the 23rd. Around noon on the same day, after the BOJ announced at the Monetary Policy Meeting that it would maintain its large-scale monetary easing policy despite the U.S. interest rate hikes, the yen exchange rate surged to the high 145 yen range per dollar. The foreign exchange authorities had hinted at possible intervention by conducting 'exchange rate checks' on market participants, citing recent speculative forces entering the market. Subsequently, the authorities directly intervened, and the exchange rate dropped to the 140 yen range per dollar. One foreign media outlet described this as a 'reverse currency war.'

[Image source=Reuters Yonhap News]

According to reports from Nihon Keizai Shimbun and others, Masato Kanda, Vice Minister of Finance for International Affairs, said, "The government is concerned about excessive fluctuations in foreign exchange. We will continue to closely monitor market trends with high vigilance and respond thoroughly." Prime Minister Fumio Kishida, who was visiting the U.S. to attend the UN General Assembly, also mentioned this at a press conference, emphasizing, "We cannot overlook repeated excessive fluctuations caused by speculation. We will firmly take necessary measures against excessive fluctuations."

At a press conference following the intervention, BOJ Governor Haruhiko Kuroda stated, "The market is focusing on the domestic and foreign interest rate gap, but there are various factors. The depreciation of the yen is a one-sided movement, and speculative factors seem to have influenced it." He added, "If the yen weakens further, it increases future uncertainties by making it difficult for companies to establish business plans, which is negative for the Japanese economy." He also said, "(The yen depreciation) boosts profits for global companies but has a greater negative impact on non-manufacturing and small and medium-sized enterprises. It also reduces personal consumption through decreased real income for households." He further noted, "It is necessary for companies whose profits have improved due to the weak yen to increase capital investment or raise wages."

◆ Why does the market believe the intervention will not be very effective?

Despite this intervention, the market expects the yen's weakness to continue for the time being. At the Monetary Policy Meeting held on the same day, the BOJ announced it would maintain its monetary easing policy by keeping the short-term interest rate at -0.1% and guiding the 10-year government bond yield, a long-term interest rate indicator, to 0%. Governor Kuroda drew a line, saying, "There will be no interest rate hikes for the time being," and "The negative interest rate policy is not causing significant side effects or problems."

Market experts particularly emphasize that this yen purchase contradicts the BOJ's monetary easing policy. On the 22nd, the BOJ sent a message that it would continue its monetary easing policy by purchasing government bonds unexpectedly, continuously applying downward pressure on the yen. The yen purchases to raise the yen's value are led by the Ministry of Finance, which conflicts with the BOJ's stance, creating a contradiction according to experts.

When the Japanese government intervenes in the foreign exchange market by purchasing yen, it uses dollars and U.S. Treasury bonds held as foreign exchange reserves. Nihon Keizai pointed out, "Yen purchases are only possible within the foreign exchange reserves (about 185 trillion yen), so there is a limit to intervention," and "The pressure on yen depreciation caused by the BOJ's government bond purchases is stronger than the yen appreciation effect from the government's yen purchases." Experts predict that realistically, it will be difficult to continuously prevent the pressure on the currency's depreciation through yen purchases because the foreign exchange reserves cannot be fully used.

Haruhiko Kuroda, Governor of the Bank of Japan (BOJ)
Photo by Reuters Yonhap News

In fact, yen purchases were made in April and June 1998, 24 years ago, but the yen depreciation continued until August afterward. Despite spending 2.8 trillion yen in April alone to respond, the yen depreciation persisted for more than four months. Bloomberg News reported that what stopped the yen's depreciation in August was not government intervention but financial market turmoil caused by the Russian financial crisis and hedge fund collapses.

Although the Japanese government mentioned cracking down on speculative forces in the foreign exchange market, Nihon Keizai forecasts that this dispute could drag on. The speculative forces mentioned here invest in other assets based on the yen, causing the yen's depreciation, but they are currently selling yen according to global fundamentals. One market participant said, "If the government artificially blocked yen depreciation that has clear reasons such as widening interest rate gaps or trade deficits, speculative forces would easily exploit that contradiction."

Jens Nordvig, CEO of U.S. data analytics firm Exante Data, told Bloomberg, "It seems that the Japanese government and BOJ are trying to maintain the yen at 145 per dollar," adding, "It may stay between 140 and 145 for a while, but the Fed's tightening and weakening economic growth will act as strong factors maintaining the dollar's strength."

This content was produced with the assistance of AI translation services.