Japan Considers Yen Intervention and Policy Adjustment Amid Mounting Economic Worries

26 Sep, 2023

Japan Considers Yen Intervention and Policy Adjustment Amid Mounting Economic Worries

Former Japanese currency diplomat Takehiko Nakao has expressed concerns about the declining value of the yen, suggesting that Japan may need to consider intervening in the currency market once again. Nakao has urged the Bank of Japan (BOJ) to reassess its extremely accommodative monetary policy.

In a recent conversation with Reuters, Nakao discussed the risks associated with prolonged monetary easing and emphasized the need for potential policy adjustments. Nakao was quoted by Reuters as saying, "While some may believe that intervention is not immediately necessary because the yen's depreciation hasn't been as rapid as it was during the last intervention in September/October, it's entirely possible that authorities will step in if the yen continues to weaken."

As the yen weakens, Japan expended over 9 trillion yen last year to stabilize its currency. The yen is trading around 147.77 against the dollar, raising concerns about its potential negative impact on Japan's exports and overall economic stability.

Takehiko Nakao, who served as the top currency diplomat from August 2011 to March 2013, oversaw a significant intervention in 2011 to manage the yen's strength in response to the U.S. Federal Reserve's quantitative easing. However, with the yen considerably weaker now, Japan faces different economic challenges, including rising import costs and increased living expenses.

Nakao's concerns align with those of investors who see prolonged monetary easing as distorting markets and affecting bank profits negatively. The weaker yen is a result of Japan's contrast with the global trend of tightening monetary control. While other major central banks, such as the Federal Reserve, have raised interest rates to combat inflation, the BOJ continues to implement strong economic stimulus measures.

As the BOJ concludes its two-day meeting this week, it is widely expected to maintain its yield curve control (YCC) targets, with short-term interest rates at a negative 0.1 percent and the 10-year bond yield at 0 percent. However, Nakao, who is engaged in discussions with current policymakers, argues for a change in direction.

Speaking to Reuters, Nakao emphasized that due to the persistent headline inflation and a notably weaker yen, the BOJ might find itself compelled to proceed with the normalization of its monetary policy. This could involve discontinuing the negative rate policy and yield curve control in order to prevent lagging behind current economic trends. Nakao pointed out that with stable JGB yields and the ascent of inflation, the present moment presents an ideal opportunity to make adjustments to yield curve control.