Japan’s yen began the year trading at 115 to the dollar. It started weakening in March and slid past 125 in April, breaking an important psychological barrier. By September, the yen had tumbled past 140, leaving markets to wonder what, if anything, would trigger defensive action. The answer came on September 22nd: as the yen nearly reached 146 to the dollar, Japan’s government stepped in to bolster the currency, by buying yen and selling dollars, the first time it has intervened to stop a slide in the currency since 1998. Kanda Masato, the vice minister of finance for international affairs, called it “decisive action”.
That may be so. But the forces dragging the yen down are formidable. The main one is the growing gap in interest rates between the BoJ and other central banks, which drives investors to dump yen in order to buy American bonds that offer higher yields. With inflation in America remaining above 8%, the Federal Reserve announced on September 21st a third consecutive big rate increase. And it is likely to continue tightening. The BoJ, meanwhile, stood pat on its ultra loose policy again on September 22nd and does not seem likely to change course: the latest decision garnered unanimous support from the bank’s policy board. Japan’s headline inflation, which hit 3% in August, has been driven mostly by higher raw material costs, with domestic demand and wage growth too weak for the bank’s comfort. Stripping away fresh food and energy, prices rose just 1.6% last month from a year earlier.
A weak yen has traditionally been seen as a plus for Japan’s economy. Major exporters have benefited from it. So do the holders of Japan’s ¥1.2 quadrillion ($8.4trn) in overseas assets. But Japan’s exporters have offshored much low-cost production and the high-value-added sales that remain are less sensitive to the exchange rate. Supply-chain snags have also made it harder for exporters to ramp up production this year. And a weaker yen has exacerbated the impact of rising import costs, which crimps consumer spending. A volatile currency also makes it harder for firms to plan.
The government’s decision to intervene directly in currency markets came after months of increasingly stiff warnings of such action. The last such direct intervention to support a falling yen was carried out in concert with America in 1998 amid the Asian financial crisis. This time, Japan seems to have moved alone. Nonetheless, the yen rallied on the announcement, to around 142 to the dollar.
Yet analysts reckon it will be a temporary reprieve. Japanese officials are also acutely aware that their interventions cannot change the currency’s underlying weakness, especially without co-ordinated action by other major economies. They may instead be aiming simply to buy time, hoping to hold out until America’s economy cools down. Yet it could prove costly to defend their new line.■