[Tokyo 26th]- Dollar-selling and yen-buying interventions by the government and the Bank of Japan will likely continue several times. The September 22nd intervention was truly a surprise attack. This intervention was a response to show a “resolute stance” not to break through the 145 yen defensive line after the US Federal Open Market Committee (FOMC) and the Bank of Japan’s monetary policy meeting were over and the materials had been exhausted.
In situations where there are no strong factors that can determine market trends, the psychological impact of foreign exchange intervention appears relatively large. Perhaps the next big deal is the November 1-2 FOMC meeting. Until the next FOMC, the market and the government will be in a standoff to see if the dollar/yen exchange rate will quickly approach 145 yen.
The previous period from March to November 2011 was not a one-time intervention (intervention included dollar buying and yen selling). Moreover, after the big intervention was announced, there was a small unannounced intervention, that is, a covert intervention, which continued for a while. For the time being, the FOMC will be held in November and December of the year, and the government is expected to strengthen its posture of being on standby at any time, and actively use verbal intervention.
When I read the comments of experts on foreign exchange intervention, many said that it had no effect or that it had a temporary effect. Is that true?
Economic analysis often compares when an event occurs and when it does not, and examines whether there is a significant difference in the fluctuation patterns between the two. Assuming that the dollar/yen exchange rate and US long-term interest rates are linked, so far the yen has not depreciated significantly despite the rise in US long-term interest rates.
The intervention has changed the market formation. Of course, when asked to what extent this is sustainable and whether exchange rates can be turned into a strong yen trend, the effect is only limited.
The government is well aware of this. However, if the yen’s depreciation continues as it is now, they probably expect that the strong dollar will eventually change direction to a weaker dollar due to the effects of US interest rate hikes.
It can be said that this is likened to the idea that if the U.S. forces remain besieged for a month or two, reinforcements will come from the U.S. side. It is expected that the trend of depreciation of the dollar and appreciation of the yen will be reversed in the near future.
At the FOMC meeting in September, the policy rate forecast for the end of 2022 was 4.4%. If short-term interest rates were raised by 0.75% at the November 1-2 FOMC meeting and by 0.75% at the December 13-14 FOMC meeting, the fed funds rate would be between 4.50% and 4.75%. If interest rates are raised this far, the economic outlook will change, and US long-term interest rates will head toward a downward trend. Naturally, the flow of yen depreciation will also change.
A reversal of the yen’s depreciation is essential for Japan’s import prices to fall. The government thinks that the weak yen is the only thing left because the crude oil market has fallen. Going forward, the consumer price index (CPI) will peak in October, and it is possible that both the headline and core inflation will exceed 3%. When the data is released in November, criticism of the Fumio Kishida administration will intensify. Therefore, I hope that the depreciation of the yen will reverse by the time the announcement is made.
The government introduced price measures in April and September this year, but the effects were minimal. If we try to put a brake on the rise in prices, it will be absolutely necessary to review the Bank of Japan’s outlook for interest rates. However, the Bank of Japan is not cooperating with it.
It intends to continue easing, using the old promise of aiming for 2% inflation in a joint statement by the government and the Bank of Japan in January 2013. Governor Haruhiko Kuroda said at a press conference that interest rates would not be raised for the next one to two years.
If the next governor of the Bank of Japan becomes a person who does not push up prices more than necessary through the weakening of the yen, speculation that monetary policy will change after April 2023 will move the exchange rate in the direction of yen appreciation. The government will cut the card of the appointment of the next governor of the Bank of Japan around December this year at the earliest. It can be said that the period in which foreign exchange intervention will stop the flow of yen depreciation will be until the timing of the appointment of the Governor of the Bank of Japan.
Even if foreign exchange intervention is implemented, if US long-term interest rates rise further, the yen will continue to depreciate. When calculating the sensitivity of the dollar/yen rate to the rise in US interest rates from the beginning of 2022, the yen depreciated by about 16 yen against the long-term interest rate of 1%. Even if the defense line for intervention is set at 145 yen, if the US long-term interest rate rises to 4.0%, it will break through 150 yen.
When US long-term interest rates approach 4.0%, it is likely that the yen will continue to depreciate and additional foreign exchange intervention will be implemented. However, if the interest rate differential between Japan and the US widens, no amount of foreign exchange intervention will work.
The foreign exchange intervention on September 22nd succeeded in pushing back the calculated dollar/yen rate by about 3 yen in the direction of yen appreciation, taking into consideration the rise in US long-term interest rates. However, this is probably because the FOMC and the Bank of Japan meetings were over, and the intervention was implemented at the timing when there was no convincing evidence.
This is the first intervention in about 11 years since November 2011. Over the past 11 years, the amount of foreign exchange transactions has naturally increased. A study by the Bank for International Settlements (BIS) found that dollar/yen trading volume per business day was $301.3 billion in 2010 and $375.5 billion in 2019. The amount of transactions in 2022 is likely to increase, so naturally the scale of intervention should also increase.
This is a point that is not often discussed, but the more the government intervenes to sell the dollar and buy the yen, the more unrealized gains will be realized. For example, if the government intervenes in foreign exchange in 2011 and sells the foreign currency (14.3 trillion yen worth, average acquisition of 79.2 yen) for 145 yen, the unrealized gain realized there is calculated to be 11.9 trillion yen. become a circle. This profit is accumulated in the Foreign Exchange Special Account. If dollar-selling intervention is implemented, the issue of what to do with this realized profit will likely surface later.
Editing: Kazuhiko Tamaki
(This column was posted on the Reuters Forex Forum. It is written based on the author’s personal opinion.)
* Hideo Kumano is chief economist at Dai-ichi Life Research Institute. Joined the Bank of Japan in 1990. He retired in July 2000 after working in the Research and Statistics Bureau and the Information Services Bureau. In August of the same year, he joined the Dai-ichi Life Research Institute. Incumbent since April 2011.
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