Officials warn that intervention in the yen will not stop sharp declines

Officials warn that intervention in the yen will not stop sharp declines


Written by Kaori Kaneko and Daniel Losink

TOKYO (Reuters) – A senior member of Japan’s ruling party warned that Japan’s efforts to stem sharp declines in the yen through unilateral market intervention will have only a limited impact, as data showed that the currency’s recent decline has blown the trade gap to a record level.

The Japanese yen held above 24-year lows against the US dollar on Thursday, a day after authorities issued the clearest signal yet that they are uncomfortable with the currency’s recent sharp declines and are ready to intervene.

The yen was last traded around 143.62 per dollar, down about 0.3%, after rising against the dollar on Wednesday on news of a potential intervention.

Satsuki Katayama, head of the ruling Liberal Democratic Party’s Financial Affairs Research Committee, said Tokyo lacks effective means to combat the yen’s fall and that unilateral interventions will be limited.

“Individual currency intervention will not be that effective” in stemming sharp declines in the yen driven by interest rate differentials between the United States and Japan, Katayama told Reuters in an interview on Wednesday.

Consistently high inflation in the US and elsewhere forced the Federal Reserve to aggressively raise interest rates, giving the dollar a significant yield advantage and resulting in a massive rally against its major global peers, including the yen.

Raising ultra-low interest rates in Japan would also be difficult given the impact it could have on 550 trillion yen ($3.84 trillion) in bank loans to the country, said Katayama, who is also a former finance ministry official with experience in financial markets. .

That sentiment was echoed by Yoichiro Tamaki, head of the opposition Democratic Party for the People, who said a rate hike would do more harm than good to the economy, and instead called for more fiscal support.

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The Bank of Japan on Wednesday conducted an interest rate check with banks clearly prepared to intervene to limit the yen’s declines, sending it up more than 1% and highlighting its nervousness about sharp declines.

weaker coins

Policymakers in Japan have historically favored a weaker currency, which makes exports more competitive, but are now concerned about the inflationary impact it will have on the cost of everything from food and eating out to more expensive utility bills and transportation.

Analysts said a price check would only give short-term support to the currency, as Tokyo may struggle to get approval from its G7 peers for a yen-buying intervention.

Other Asian economies are also turning their attention to the risks of weaker local currencies.

In South Korea, the country’s foreign exchange authority was seen selling dollars to curb the won’s decline, after the currency reached its lowest level in nearly 13-1/2 years.

Separately, data on Thursday showed that the trade deficit posted the largest one-month deficit ever in August at $19.7 billion. The explosion followed a drop of nearly 20% in the yen since the beginning of the year.

A weak yen has caused particular suffering to household budgets facing pressure from rising prices, said Ayako Sera, market strategist at Sumitomo Mitsui (NYSE:) Trust Bank.

“When comparing the positive and negative impact of a weak yen on the situation in Japan in general, it is clear that there are more negatives,” Serra said.

Trade data showed the average exchange rate was 135.08 yen to the dollar, up 22.9% to the dollar against the yen from the previous year.

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