Breakingviews - Tokyo blinks in game of forex chicken - Reuters

TOKYO, Sept 22 (Reuters Breakingviews) - The Japanese government has grudgingly responded to the Federal Reserve’s hiking cycle by moving to prop up the staggering yen , the first such intervention since 1998 read more . The “decisive action”, in the words of Vice Finance Minister for International Affairs Masato Kanda, caused the currency to pop up to 140 per dollar. But the country’s economic outlook makes such intervention unlikely to work.

Bank of Japan Governor Haruhiko Kuroda must be a frustrated man. There is no domestic case for him to hike interest rates; inflation is slightly above his 2% target, but for the wrong reasons, namely war in Europe and excess stimulus in the United States. Japanese growth, at 2.2% in the last quarter, is uninspiring. The BOJ would rather wait for the outcome of companies’ annual wage negotiations next year before leaping to policy conclusions.

And yet. Runaway inflation in the United States has caught the U.S. Federal Reserve off guard, so Chair Jerome Powell has been forced to hike rates aggressively read more even as Kuroda maintained Japan’s ultra-loose monetary policy on Thursday. That further widens the gap between American and Japanese benchmark bond yields – already well over 3 percentage points – which further hurts the yen. The currency has lost 29% since a peak in December 2020, most of that since March. Even Japanese exporters that benefit from a weak currency are anxious about its volatility – what goes down can rebound just as quickly.

That’s why Tokyo has decided to deploy some of its $1.3 trillion in forex reserves to stem the slide. Yet Japan’s economic divergence from its western peers means the best the government can hope for is to moderate the slope of the yen’s descent.

There is a worse scenario, however. Bond investors have already expressed scepticism towards the BOJ’s commitment to keeping the 10-year sovereign bond yield below 0.25%. They pushed the yield above that limit in June and again this week, Refinitiv data show. The Tokyo financial community is awash with rumours that foreign hedge funds have been vigorously shorting the yen in New York and London trading hours. That may explain the government’s decision to intervene. But if it doesn’t work – and unilateral interventions have a poor track record – then Japanese authorities’ credibility will take a major hit. That would make the Bank of Japan’s job even harder.

Parting ways

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(The author is a Reuters Breakingviews columnist. The opinions expressed are his own.)

CONTEXT NEWS

Japan intervened in the foreign exchange market for the first time since 1998 in an attempt to prop up the yen.

The Japanese currency has depreciated nearly 20% against the dollar this year, as the Bank of Japan has stuck to its ultra-loose monetary policy even as other central banks have raised rates.

The move initially sent the dollar plunging over 2% to 140.3 yen. The yen was at 141.11 to the dollar as of 1225 GMT.

Editing by Neil Unmack and Oliver Taslic

Our Standards: The Thomson Reuters Trust Principles.

Opinions expressed are those of the author. They do not reflect the views of Reuters News, which, under the Trust Principles, is committed to integrity, independence, and freedom from bias.

Pete Sweeney

Thomson Reuters

Asia Economics Editor Pete Sweeney joined Reuters Breakingviews in Hong Kong in September 2016. Previously he served as Reuters' chief correspondent for China Economy and Markets, running teams in Shanghai and Beijing; before that he was editor of China Economic Review, a monthly magazine focused on providing news and analysis on the mainland economy. Sweeney came to China as a Fulbright scholar in 2008, and in that role conducted research on the Chinese aviation industry and outbound M&A. In prior incarnations he helped resettle refugees in Atlanta, covered the European Union out of Brussels, and took a poorly timed swing at craft-beer entrepreneurship in Quito even as the Ecuadorean currency collapsed (not his fault). He speaks Mandarin Chinese, at the expense of his Spanish.

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https://www.reuters.com/breakingviews/tokyo-blinks-game-forex-chicken-2022-09-22/

2022-09-23 04:18:00Z
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