Bank of Japan steps in, but effect on yen unclear

The Bank of Japan intervened in the yen’s exchange rate for the first time in years, briefly arresting the yen’s decline against the backdrop of the US Federal Reserve’s aggressive interest rate hikes, but analysts believe that the long-term effect remains to be seen.

After the Fed announced an interest rate increase of 75 basis points on Sept 21, the yen fell significantly against the US dollar, prompting Japan’s central bank to announce it would continue to implement large-scale quantitative easing, making Japan the only major economy to maintain negative interest rates.

After BOJ governor Haruhiko Kuroda said that the policy of continued quantitative easing has not changed and the adjustment of financial policy will be two to three years away, the yen continued its decline against the US dollar, approaching the 146:1 mark as of 5 pm that day, a 24-year low. However, less than an hour later, the yen briefly recovered to 140:1, prompting speculation that the Japanese government had intervened to buy the yen and sell dollars. Senior finance officials later confirmed this was the case.

This is the first time in 24 years that the Japanese government has intervened in the yen’s exchange rate. Some argue that Japan received prior approval from the United States for its intervention. Therefore, the determination of Japan to maintain its existing loose monetary policy may not change in the short term, but that will further expand the interest rate gap between the yen and the US dollar and the euro. As long as the BOJ continues to maintain its current monetary policy, the general trend of the yen’s depreciation will be difficult to reverse, and Japan’s exchange rate intervention is in effect paying for its central bank’s monetary policy.

The use of exchange rate interventions to keep a currency’s foreign exchange stable is like removing boiling water and then returning it to keep the pot from boiling over. Some Japanese economists believe that the yen’s exchange rate intervention can only slow down the yen’s depreciation, but cannot stop it. It is also believed that the Japanese government’s intervention in the yen’s exchange rate is just a “delicate agreement” reached by the Japanese government, the BOJ and the US, but cannot resolve the “structural contradictions” between the Japanese government and the central bank over financial policies.