Japan Faces Diminishing Returns From Intervention To Support Yen

(Bloomberg) -- Japan’s apparent back-to-back forays in the currency market last week highlight the difficulty of timing moves to keep traders on guard without diminishing the effectiveness of intervention.

Authorities had the element of surprise on Thursday with a suspected ¥3.5 trillion ($22 billion) move during a period of low volatility as the yen strengthened against the dollar following soft US economic data. 

While that generated a quick four-yen appreciation in the currency against the dollar, the gain began to steadily fade, until a follow-up move on Friday, estimated at around ¥2.1 trillion. Yet this second apparent action nudged the currency by just one-and-a-half yen.

It’s a dilemma for Japan’s currency chief Masato Kanda, who has to find fresh ways to keep speculators on the back foot as authorities look to buy time ahead of monetary policy meetings by the Bank of Japan and the Federal Reserve later this month.

“Kanda has widened the scope of wariness in the market by acting when a move can be effective rather than responding to volatility,” said Kumiko Ishikawa, senior analyst at Sony Financial Group Inc. “But it doesn’t seem like the yen strengthened by much on July 12, given the ¥2.1 trillion scale of the move.” 

Japan’s policymakers are still wrestling with central problem of balancing a desire to firmly establish a healthy inflation trend in an economy with the need to stem falls in the currency that are fueling inflation and dissatisfaction among voters and smaller businesses.

If the BOJ raises interest rates at a faster pace, it would offer support for the yen, but could at the same time derail attempts to forge a cycle of rising wages, prices and growth. 

That leaves the central bank in a tight spot further complicated by its decision last month to wait until July before announcing plans to pare back its buying of government bonds.

Kono Taro, Japan’s digitalization minister and a former candidate for leadership of the ruling party, said the BOJ should simply raise rates to support the currency.

“The currency is a problem for Japan,” Kono said, speaking with Bloomberg TV on Wednesday. “The yen is too cheap and we need to bring it back.” 

Kono, who has long said he aims to eventually become premier, deflected a question on the possibility of launching his own bid to replace Prime Minister Fumio Kishida at an election for the presidency of the ruling Liberal Democratic Party in September. 

While a majority of surveyed economists don’t expect a rate hike at the conclusion of the central bank’s two-day meeting on July 31, no rate change may trigger renewed falls in the yen. A more aggressive paring back of bond purchases may help the yen at the risk of looking too aggressive for some market participants. 

Economists point out that it’s almost impossible for the meeting to satisfy everyone.

“It’s a tough call for the BOJ,” said Tsuyoshi Ueno, senior economist at NLI Research Institute. “My base case is no rate hike this time but I’m not ruling out that chance.”

Charu Chanana, Singapore-based strategist at Saxo Capital Markets Pte, is among the market analysts who point to the central bank’s tendency to disappoint market expectations and keep the yen under pressure. She flagged the weakening impact of Japan’s interventions.

“Its effects are waning,” she said. “Without coordinated efforts and fundamental shifts, interventions are unlikely to sustain a stronger yen,” she added.

The yen was little changed at 158.34 versus the dollar at 1:32 p.m. in Tokyo.

Still, some economists see the diminishing returns of intervention as a potential catalyst for the BOJ to act now that the finance ministry has stepped in again.

“I believe the BOJ will raise interest rates again this month,” said Hideo Kumano, economist at Dai-Ichi Life Research Institute. “With interventions having only a limited effect, the BOJ would be lauded by the government if it can move now to help the yen.”

--With assistance from Ruth Carson, Alastair Gale and Shery Ahn.

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