Japan’s suspected intervention in the currency market failed to stop the decline of the yen

TOKYO (Reuters) – Japanese policymakers on Monday continued their efforts to limit sharp declines in the yen, including during two consecutive days of suspected market intervention, but ultimately failed to prop up the currency in the face of the dollar’s continued strength.

The yen selloff has hurt the world’s third-largest economy by paying already high import bills and challenging the Bank of Japan’s commitment to ultra-low rates in the face of rapid global monetary tightening to combat rampant inflation.

The Japanese currency jumped 4 yen to 145.28 per dollar in early Asian trading on Monday, indicating the authorities’ intervention for the second day in a row after a similar move by Tokyo on Friday.

“We will not comment,” Masato Kanda, deputy finance minister for international affairs, told reporters at the finance ministry when asked if they had intervened again on Monday.

“We are monitoring the market 24/7 while taking appropriate responses. We will continue to do so from now on,” said Kanda, who oversees Japan’s exchange rate policy.

However, the yen failed to hold on to early gains and briefly bottomed at 149.70 per dollar, as markets continued to focus on the growing divergence between the Bank of Japan’s ultra-easy monetary policy and the plans to raise fixed rates by the US Federal Reserve. The last time stood around 148.80.

“In previous crises related to the pound sterling and the Italian lira, the authorities have ended up failing to defend their currencies. Likewise, Japanese covert intervention has only limited effects,” said Daisaku Ueno, chief forex analyst at Mitsubishi UFJ Morgan Stanley Securities.

“Strength in the dollar is the biggest factor behind the yen’s weakness. If the US shows signs of peak interest rate hikes and even rate cuts, the yen will stop weakening even without intervention.”

BOJ’s BIND

The plight of the yen puts the Bank of Japan in the spotlight as it meets for its two-day interest rate meeting ending on Friday, when it is widely expected to maintain a very loose monetary policy.

With inflation relatively modest and the economy unable to move faster, the central bank is wary of raising interest rates and risking a recession.

“It is highly undesirable” that Japan’s inflation-adjusted real wages continue to fall, Bank of Japan Governor Haruhiko Kuroda told parliament on Monday.

“It is desirable that inflation steadily achieves our 2% target accompanied by a rise in wages,” Kuroda said, stressing the need to continue to support the economy at very low rates.

The Federal Reserve, which meets the following week, is widely expected to raise interest rates again as it focuses on fighting hyperinflation.

The widening of the price differential between the US and Japan is likely to continue downward pressure on the yen, which has fallen more than 20% against the dollar this year.

Japanese authorities confirmed they had intervened in the market when they intervened on September 22, spending 2.8 trillion yen ($18.80 billion) to prop up the yen for the first time since 1998.

Since then, authorities have been silent on whether they have made any further attempts to prop up the currency, including on Friday, when Tokyo was likely to intervene surreptitiously.

At $1.33 trillion, Japan’s foreign exchange reserves provide enough firepower to intervene multiple times, but traders doubt Tokyo will be able to reverse the yen’s downward trend on its own.

Finance Minister Shunichi Suzuki reiterated that excessive currency movements are undesirable.

“We absolutely cannot tolerate excessive movements in the foreign exchange market on a speculative basis,” he told reporters at the Finance Ministry. “We will respond appropriately to excessive volatility,” he said, a view echoed by Prime Minister Fumio Kishida in parliament later on Monday.

(dollar = 148.9000 yen)

Additional reporting by Tetsushi Kajimoto and Yoshifumi Takemoto; Additional reporting by Chang Ran Kim, Sakura Murakami and Lika Kihara. Editing by Shree Navaratnam by Sam Holmes

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