TOKYO, Reuters : Japan’s finance minister said that if the yen fell to two-decade lows against the dollar, it would hurt the economy because it would raise living costs at a time when wage growth is still slow.
Governor Haruhiko Kuroda, who is known as an advocate of weak currencies, has also said that businesses might have a hard time making business plans when the yen drops.
During a trip to Washington this week, Japan’s Finance Minister, Shunichi Suzuki, said that he would “closely communicate” with the United States about currencies and that he would meet with Janet Yellen at a G20 finance meeting.
As well as telling people not to lose their money, Japan has other ways to stop the yen from falling too far. One of them is to buy a lot of yen in the currency market and then sell it.
In this section, we’ll talk about how the yen-buying intervention might work, how likely it is, and what might go wrong.
When did Japan last do something like this?
Japan has historically tried to stop sharp rises in the yen and not do anything about falls in the yen. This is because the economy is heavily reliant on exports.
Interventions to buy yen have been very rare. The last time Japan did something to help its currency was in 1998 when the Asian financial crisis caused a yen sell-off and a lot of money to leave the country. Yen prices fell in 1991 and 1992, so Tokyo tried to stop them.
What would make Tokyo want to buy yen again?
Currency intervention costs a lot of money, and it could fail because it is hard to change the value of currencies in the huge global foreign exchange market.
That’s one of the main reasons it’s seen as a last-ditch move, which Tokyo would only allow if it couldn’t stop the yen from falling too far. Officials would have to consider how quickly the yen fell, not just how low it was.
Expatriate currency diplomat Eisuke Sakakibara told Reuters that if the yen fell below 130 to the dollar, the government might have to act.
Some policymakers say that if Japan sees a “triple” selling of the yen, its stocks, and its bonds, they might intervene. This would be similar to the sharp capital outflows that some emerging economies have seen.
What would it be?
In order to stop the yen from rising, Japan intervenes. The Ministry of Finance issues short-term bills to raise yen, which it can then sell in the market to weaken the value of the Japanese currency.
If the government were to intervene to stop the yen from falling, they would have to get money from Japan’s foreign reserves. They would sell dollars in the market for yen.
In both cases, the finance minister will have the final say on whether or not to intervene. The Bank of Japan will act as an agent and do the work for you in the market.
It’s hard to answer this question.
Intervention to buy yen is more difficult than intervention to sell yen.
As part of its intervention to sell dollars and buy yen, Japan needs to use its foreign reserves to get dollars it can sell to the markets in exchange for yen.
In this case, there are limits to how long it can keep intervening. For example, Tokyo can’t keep issuing bills to raise the yen.
Second, only to China’s foreign reserves, Japan’s were worth $1.356 trillion. Most likely, they were made up mostly of dollars, but there were some other currencies as well. While there are a lot of them, their size could quickly shrink if huge sums are needed to change prices each time Tokyo comes in.
Currency intervention would also need to be approved by Japan’s G7 partners, especially the United States if it were to be done against the dollar/yen. That’s not going to be easy because Washington has always been against the idea of changing the value of the dollar, except in cases of extreme market volatility.