The sliding value of the yen against the dollar has raised concerns of possible intervention by Japanese authorities. However, propping up the currency could prove difficult and hard to justify due to various factors. The Bank of Japan’s hesitation to exit its ultra-easy monetary policy, while the US Federal Reserve is considering further tightening, is seen as one of the main reasons for the yen’s decline. Intervention is considered both financially risky and politically charged, as it would require the BOJ to draw down massive amounts of dollar reserves. Additionally, Tokyo could face pushback from Washington due to the commitment of major rich democracies to allowing markets to determine exchange rates.
Analysts and investors see the 150 yen per dollar level as a red line for currency intervention due to its significance as a symbol of rising costs of imported food and fuel. Public opinion is particularly important at this time, given speculation that Prime Minister Fumio Kishida may call a snap election. While the Japanese Ministry of Finance has stated that it does not have a “defence line,” Finance Minister Shunichi Suzuki has warned that Tokyo is closely watching the currency market and is prepared to respond to excessive volatility. However, intervention may prove problematic politically and economically, as the rising cost of living and yen weakness are visible concerns for the Japanese public.
The possibility of intervention remains uncertain as market conditions do not currently meet the criteria for such action. Measures of expected market volatility are subdued, and yen speculative short positions are not at previous highs. Some analysts argue that fundamentals support a weaker yen, but the currency has been held back by the anticipation of intervention and the possibility of the BOJ moving away from negative interest rates. While US officials have expressed a general understanding of the need to smooth out undue volatility, taking action to intervene in the currency is likely to be seen as less costly than doing nothing. Ultimately, the decision to intervene will be political, even though it may not have significant economic or monetary impacts.
Overall, the decline of the yen has put Japanese authorities in a difficult position regarding possible intervention. The divergence in monetary policies between the Bank of Japan and the US Federal Reserve, as well as the significance of the 150 yen per dollar level and public concerns about rising costs of living, contribute to the debate on whether intervention is necessary. The decision to intervene is seen as a political one, and the success of such action is uncertain given the current market conditions.
