A renewed slide in the yen past the key psychological level of 140 against the dollar has once again drawn investor attention to Japanese officials’ comments on the currency. Its drop to a fresh 24-year low has the potential to damage the world’s third largest economy.
(Bloomberg) — A renewed slide in the yen past the key psychological level of 140 against the dollar has once again drawn investor attention to Japanese officials’ comments on the currency. Its drop to a fresh 24-year low has the potential to damage the world’s third largest economy.
Finance Minister Shunichi Suzuki’s latest remarks suggest continued caution, and aren’t quite at the level of intensity of officials’ comments at the end of April, when the Bank of Japan doubled down on its easing stance. Chief Cabinet Secretary Hirokazu Matsuno’s phrasing on the yen also suggests intervention isn’t imminent.
Meanwhile, Governor Haruhiko Kuroda’s resolve seems undiminished as he talks about how the BOJ’s sustainable inflation goals can’t be met without robust wage gains — a scenario that seems unlikely to be achieved by the end of his term in April.
Given that the Federal Reserve and the BOJ’s policies are still firmly on diverging paths, a weak yen trend is likely to persist. Key central bankers made clear during last weekend’s Jackson Hole meeting that they’ll continue with their rate hike path to rein in inflation, even at the expense of economic growth.
As a softer currency exacerbates the pain of rising commodity prices and boosts the cost of other imported goods, Prime Minister Fumio Kishida and his government may be forced into taking more steps to help households and firms. For now, Kishida is set to unveil details of additional measures to ease the impact of inflation this month.
Judging by the latest comments, the exchange rate still has some way to go before the finance ministry would consider intervention. It hasn’t stepped in to prop up the currency via purchase operations for over two decades. With the US likely to oppose any moves to weaken the dollar, Japan faces the dilemma that intervention may not achieve very much.
Here is a guide to how the gradation of language used by policy makers in the past has indicated how close they are to entering markets.
When volatility is slight
- Officials will typically decline to comment. Or, if they do, say something like:
- “We aren’t swayed by movements in currencies.”
When volatility persists
- “Stable exchange rates are desirable.”
- “It’s desirable for exchange rates to reflect Japan’s economic fundamentals.”
When monitoring increases
- “We are watching/monitoring developments in currency markets.”
- “We are carefully watching developments in currency markets.”
- “We are watching exchange rates closely/with great interest.”
When concern rises
- “Sudden/abrupt/rapid movements in exchange rates are undesirable.”
- “Currency markets that aren’t reflecting economic fundamentals are undesirable.”
- “We will monitor markets with vigilance.”
- “Excessive movements in exchange rates are undesirable/have bad effects on the economy.”
When concern becomes discomfort
- “Exchange rates aren’t reflecting economic fundamentals.”
- “Yen gains/declines have been excessive/one-sided.”
When sharp language is needed
- The next thing to watch for is often the key word “clearly”:
- “Exchange rates are clearly not reflecting economic fundamentals.”
- “Movements in exchange rates have clearly been excessive/one-sided.”
When it’s time for a warning
- “We can’t tolerate speculative moves.”
- “We will take appropriate action if needed.”
When intervention becomes a possibility
- “We won’t rule out any options/means to combat excessive movements.”
- “We’re ready to take decisive/bold action to counter excessive/speculative moves.”
The finance ministry makes any decision to intervene in the market. When it does, it instructs the central bank to buy or sell the currency. It most recently sold the yen to restrain gains in 2011. The last time Japan purchased the yen to stem losses was in 1998.
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