Japan frets over relentless yen slide as BOJ keeps ultra-low rates

“Currency intervention, in a scenario where we’re seeing upward pressure on US Treasury yields, is going to be a futile exercise.” Rodrigo Catril

JAPAN is concerned about negative effects of the weak yen, according to Finance Minister Shunichi Suzuki in a fresh warning to speculators as the currency fell further after the central bank’s widely expected decision to hold rates steady.

The Bank of Japan (BOJ) kept policy settings unchanged following a two-day meeting that ended a short while ago, triggering another brief bout of selling in the yen to below 156 levels on the dollar, its weakest since 1990.

The latest wobbles in the currency came as Suzuki, who spoke hours ahead of the BOJ decision, repeated his recent warnings against speculative moves in the yen, keeping traders on edge as to when Tokyo may intervene in the markets.

“The weak yen has both positive and negative effects (on the economy),” Suzuki told a press conference, adding that he is “more concerned about the negative effects right now.”

Suzuki said he could not comment on specific policy measures on foreign exchange, but that authorities were closely watching currency moves and stood ready to take action.

While a weak yen boosts exports, it has become a headache for Japanese policymakers as it inflates the cost of living for households by pushing up import prices.

The minister said that measures to combat surging prices are key policy priorities for the government.

The yen’s slide to 34-year lows against a broadly firmer dollar has been driven by wide Us-japan interest rate differentials.

The yield-induced downturn in the yen has gained renewed momentum on signs the BOJ will go slow on raising its near-zero rates and expectations the US Federal Reserve will likely delay the start of its rate-cutting cycle.

Markets are now looking to any hints from BOJ governor Kazuo Ueda on how the weak yen could affect the next rate hike timing.

“The currency takeaway is certainly disappointment from the lack of guidance from the bank,” said Rodrigo Catril, senior Sydney-based forex strategist at National Australia Bank (NAB).

“To me, the currency market is telling us it believes that the BOJ policy is too loose and hence why the currency is so weak.”

The yen hovered around 156.12 in afternoon trade after weakening as much as 156.16 per dollar.

The yen’s continued weakness has taken it firmly past 152 and 155 levels to the dollar, which traders had previously seen as a line in the sand that would prompt Tokyo to intervene in the markets. It is down 9.4% on the dollar this year and has lost more than 33% of its value in three years.

Suzuki declined to comment on remarks made by US Treasury secretary Janet Yellen that the US dollar has been strong and interventions by other governments in currency markets is acceptable only in rare and extraordinary circumstances.

At the parliament later in the day, Suzuki said while foreign exchange levels reflect various factors including economic indicators and price trends, interest rate differentials remain the crucial determinant.

Japan last intervened in the currency market in 2022, spending roughly Us$60bil to defend the yen.

Traders figure there is not much Tokyo can do to reverse the currency’s slide while interest rates and momentum are heavily skewed against it.

“Currency intervention, in a scenario where we’re seeing upward pressure on US Treasury yields, is going to be a futile exercise,” NAB’S Catril said.

Frederic Neumann, Hong Kong-based chief Asia economist at HSBC said: “While the official statement dropped a reference to monthly bond purchases, officials left the door open to continue with the current pace of intervention in the Japanese Government Bond (JGB) market.

BOJ officials likely tried to drop a subtle hint that its balance sheet operations are subject to review, which reinforces its hawkish bias.”

“At the same time, officials shied away from announcing bolder measures, likely because they would like to retain flexibility in their purchase operations.

Tricky situation

The recent spike in US yields makes it tricky for the BOJ to step away from its own JGB purchases, for any hint of a scale-back could lead to Japanese yields becoming a lot more volatile.

With the Fed keeping its foot firmly on the break, the BOJ will need to retain the option of scaling up JGB purchases as needed to smoothen any impact of tighter US financial conditions on Japanese rates markets and the currency,” Neumann said.

Charu Chanana, Singapore-based head of currency strategy at Saxo, said: “And yet again, BOJ has proved that it can surprise dovish to even the most-dovish expectation on the Street.

“Markets will likely be reaffirmed in their belief of the carry, and continue to test the limit of yen weakness.”

“US dollar-japanese yen exchange rate could see an accelerated move towards 158 to 160, with Kanda’s comments of a 10-yen move in a month as a threshold for intervention giving room for further upside.

“US personal consumption expenditure data on the radar, and we are back to waiting for an intervention to stop the rout in the yen. But any intervention, if not coordinated and without the support of a hawkish policy messaging, will still be futile,” she explained.