Japan has responded to the Fed’s rate hikes by moving to prop up the staggering yen, the first intervention since 1998. It is unlikely the plan will work and the attempt may even backfire, says petesweeneypro
Japanese yen and U.S. dollar banknotes are seen with a currency exchange rate graph in this illustration picture taken June 16, 2022. REUTERS/Florence Lo/IllustrationHONG KONG, Sept 22 - The Japanese government has grudgingly responded to the Federal Reserve’s hiking cycle by moving tothe staggering yen, the first such intervention since 1998. 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.
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 toeven 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.
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.
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Tokyo blinks in game of forex chickenJapan has responded to the Federal Reserve’s rate hikes by moving to prop up the staggering yen, the first intervention since 1998. The country’s economy and Bank of Japan Governor Haruhiko Kuroda’s loose policy make it unlikely the plan will work. The attempt may even backfire.
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