Rate hikes to keep up with the Fed would work. But the Bank of Japan still digs in its heels. Its balance sheet has shrunk for months though.
By Wolf Richter for WOLF STREET.
The Bank of Japan is now getting serious about propping up the yen with direct market intervention, after jawboning by the government and by the BoJ has failed to halt the yen’s plunge against the dollar.
On Wednesday, the BoJ conducted a foreign exchange “rate check,” asking market participants about trends in the foreign exchange market, according to sources cited by the Nikkei. “This is believed to be a move to prepare for foreign exchange intervention,” the Nikkei said.
The yen started plunging against the dollar in January 2021. At the time it took about ¥104 to buy $1. The plunge took on momentum in March 2022, when the Fed started hiking its policy rates. Yesterday evening it took ¥144.8 to buy $1, a level the yen hasn’t seen in decades. On the news of the rate check, the exchange rate briefly rose by ¥2 to ¥142.7, but has now already given up some of the gains and is trading at ¥143.2 to the USD, as markets harbor their doubts,
If the Ministry of Finance and the BoJ actually intervene, they would have to sell foreign exchange assets, such as holdings of US Treasury securities, and buy yen with those dollar-proceeds.
But the intervention is limited by the amount of foreign exchange reserves that Japan has, and it cannot be the kind of unlimited “whatever it takes forever” threat that central banks like to hang over markets.
And markets know that too. And that’s why propping up a currency by selling limited foreign exchange assets might slow the decline short-term but isn’t a long-term solution to a crashing currency.
For the US, there is also an interesting aspect to Japan’s foreign exchange sales: If those sales are large enough, they will put downward pressures on prices and upward pressure on yields.
Finance Minister Shunichi Suzuki told reporters today there would be no advance announcement of an intervention, and that authorities would usually not confirm afterwards that an intervention had even taken place, according to Reuters. “If we were to step in, we will do so swiftly without any interruption,” Suzuki told reporters.
The plunge of the yen against the dollar is a big problem for Japan that authorities have been lamenting for months: Raw materials, fuels (nearly all of which Japan is importing), agricultural products, industrial materials and components, consumer goods, etc., are getting much more expensive to buy with the much weaker yen, which has been cutting into profit margins, has been ballooning the trade deficit, and has been fueling the wrong kind of inflation which is cutting into consumption by consumers.
The weakness of the yen, which exacerbates the surge in fuel prices for Japan, has set off a massive wave of monthly trade deficits starting in mid-2021.
The Ministry of Finance already reached out to the US Treasury Dept and asked for coordinated buying of the yen to prop up the currency but was brushed off, according to Japanese media reports in April. So a one-sided intervention now with limited foreign exchange reserves would be all Japan can do.
Everyone knows what the problem is.
The Bank of Japan hasn’t budged off its negative interest rate policy for short-term interest rates and it still maintains its rate peg of the 10-year yield at under 0.25% that it threatens to enforce with “unlimited” buying of Japanese Government Bonds (JGBs), even as inflation in Japan has risen above its target, and even as the Fed, the ECB, and other central banks have hiked their rates in large increments.
The BoJ could solve the currency problem by abandoning its rate peg on the 10-year yield and letting it go, and by hiking its short-term policy rates in big catch-up rate hikes to get somewhere near the Fed’s rates, and by ramping up quantitative tightening.
But BoJ governor Haruhiko Kuroda, a remnant of Abenomics which relied on a huge burst of money printing and interest rate repression, will stay in office until April 2023, and he has been digging in his heels on rate hikes.
He has already ended the money-printing spree that Abenomics became infamous for, and the balance sheet has been declining for four months. But rate hikes, yikes! Not Kuroda. He’s still talking tough and blowing off companies frustrated by surging costs and consumers frustrated by rising prices.
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