Japan expands its FX watch to include the risk that the yen will rise as worries about a U.S. recession grow.

Tokyo (Reuters) – Officials told Reuters that Japanese policymakers who are worried about the yen going down also have to watch out for it going up. This shows that currency market intervention is less likely than some investors think.

Japan has warned more about sudden drops in the value of the yen. Last month, the government and the central bank made a rare joint statement saying they were ready to step in if the yen fell too quickly.

Three policymakers who know about the situation said that the government is also paying attention to the risk of a sharp rise in the yen. This doesn’t change the fact that they are still trying to stop the yen from falling too much.

The market is worried that the U.S. Federal Reserve’s aggressive monetary tightening to fight inflation could cause a recession in the U.S., which would force the central bank to slow interest rate hikes. This is why the focus is shifting.

They said that could make the dollar weaker against the yen.

“The US economy could fall into a recession, which could cause a lot of people to sell dollars,” said one of the policymakers who did not want to be identified.

“We need to worry about both the chance that the dollar will fall too much and rise too much.”

Another policymaker said that the sharp drops in the yen were still the biggest worry.

“But you also need to keep an eye on the risk of a sharp rebound in the yen as the market’s attention shifts,” said the second policymaker.

The worry shows how rising fears of a global recession could be changing how Japanese policymakers see the future of the yen. Previously, they were only concerned about the risk of the yen falling further, but now they are taking a more balanced view.

Policymakers are paying more attention to the possibility that the trend of a weak yen could change. This makes it more likely that the Bank of Japan (BOJ) will keep its low interest rates.

The difference between Japan’s low interest rates and the Fed’s interest rate hikes has been a big reason why the yen has been falling.

Some people in the market think that the BOJ could change its easy policy to stop the yen from falling even more. But Governor Haruhiko Kuroda has ruled that out, saying that the weak economy still needs financial help.

RED FLAG?

The Japanese government has always preferred a weak yen to a strong one, because a strong yen hurts exports by making Japanese goods less competitive overseas.

But the recent drop of the yen against the dollar to its lowest level in 24 years has become a worry because it hurts households and retailers by making the already rising costs of imported fuel and raw materials even higher.

The Japanese government’s threats haven’t stopped the yen from falling. Even though Tokyo has said it would step in to help, it has not.

The fact that policymakers are now looking at both rising prices and global recession shows that the market is no longer just worried about rising prices.

In the first quarter, the U.S. economy shrank a little more than expected because COVID-19 infections came back and cut spending on services. This is a red flag for the future of the economy.

Policymakers at the European Central Bank are also starting to worry about a recession. This is happening as they prepare for the bank’s first interest rate hike in more than a decade, which is meant to stop inflation.

Yasuhide Yajima, chief economist at NLI Research Institute, said, “It’s hard to think that the yen will keep falling at the same rate if you know that the Fed’s aggressive rate hikes will slow down the U.S. economy.”

“If that’s the case, there’s nothing Japan needs to do about the weak yen.”

Since 2011, when it stepped in to stop a sharp rise in the yen after an earthquake and tsunami destroyed the economy, Japan hasn’t changed the currency market.

The last time the government did something to help the yen was in 1998.