Japan closes in on yen intervention

  • Japan says ‘concerned’ about sharp declines in yen
  • High-ranking diplomat says ‘all options on the table’
  • Tokyo ready to respond appropriately in line with G7 policy
  • Falling yen pressures BOJ ahead of next week’s meeting
  • Analysts see low chance of intervention, BOJ policy adjustment

TOKYO, June 10 (Reuters) – The government and the central bank of Japan said on Friday they were concerned about the yen’s recent sharp declines in a rare joint statement, the strongest warning yet that Tokyo could intervene to support the currency on a 20-20% drop. year lows.

The statement underscores growing concern among policymakers about the damage that the sharp devaluation of the yen could inflict on Japan’s fragile economy, hurting business activity and consumers.

But many market participants doubt that G7 member Japan will soon step in to directly prop up the yen, a diplomatically charged and potentially expensive course of action that last took place 20 years ago.

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After a meeting with his counterpart at the Bank of Japan (BOJ), top currency diplomat Masato Kanda told reporters that Tokyo “will respond flexibly with all options on the table”.

He declined to say whether Tokyo could negotiate with other countries to jointly enter the market.

The G7, of which Japan is a member, has a long-standing policy that markets must determine exchange rates, but that the group will closely coordinate currency movements, and that excessive and disorderly exchange rate movements can hinder growth.

“We have seen sharp declines in the yen and are concerned about recent movements in the currency market,” the Ministry of Finance, the BOJ and the Financial Services Agency said in a joint statement released after their executives’ meeting.

“We will communicate closely with each country’s monetary authorities and respond accordingly as necessary,” based on G7 principles, the statement said.

Employees from the three institutions meet occasionally, usually to signal the markets their alarm about sudden market movements. But it is rare for them to issue a joint statement with explicit warnings about currency movements.

The yen briefly rose to 133.37 yen per dollar after the statement, up 0.7% on the session before settling at 133.67.

“Tokyo may step in if the yen drops below 135 to the dollar and starts to go into freefall. That’s when Tokyo really needs to step in,” said Atsushi Takeda, chief economist at the Itochu Economic Research Institute in Tokyo.

“But Washington is not going to join, so it will be an individual intervention. For the United States, there is really no merit in joining Tokyo in the intervention.”

South Korean won, Chinese yuan, and Japanese yen banknotes are seen on 100-dollar bills in this illustration taken in Seoul, South Korea, December 15, 2015. REUTERS/Kim Hong-Ji

The yen’s sharp declines have inflated already-rising raw material import costs, raising the cost of living for households and putting pressure on the BOJ to deal with rising inflation.

The BOJ and the US Federal Reserve are scheduled to hold policy meetings next week.

With the Japanese economy still much weaker than its peers, the BOJ is expected to maintain its ultra-easy policy next week. But it will face the dilemma of having to keep rates low, even if that could fuel further declines in the yen.

“I don’t think today’s statement would have a direct impact on the BOJ policy meeting next week,” said Hiroshi Ugai, chief economist for Japan at JPMorgan Securities. “There are limits to what the BOJ can do.”

INTERVENTION BAR IS HIGH

Unlike other major central banks that are signaling aggressive interest rate hikes to fight inflation, the BOJ has repeatedly pledged to keep rates low, making Japanese assets less attractive to investors.

This widening policy divergence caused the yen to fall 15% against the dollar since the beginning of March and a range of 135.20 reached on January 31, 2002. A range that would be the smallest since October 1998.

Underscoring the public’s growing sensitivity to the rising cost of living, BOJ Governor Haruhiko Kuroda was forced to apologize on Tuesday for a remark the day before that households were more accepting of price increases. see More information

“What could potentially slow the pace of depreciation is a change in policy, but at the moment there appears to be no indication that the Bank of Japan is concerned about inflation or the impact of the weak yen on it,” said Moh Siong Sim, a currency strategist at Bank of Singapore.

“This (the joint statement) is more of a verbal intervention and I’m not sure if this will be an action and will not have any impact on the yen,” he said, adding the barrier to real foreign exchange intervention. market remains very high.

Given the economy’s heavy reliance on exports, Japan has historically focused on containing the yen’s sharp rises and has taken a disinterested approach to the yen’s declines.

The last time Japan intervened to support its currency was in 1998, when the Asian financial crisis triggered a sale of yen and a rapid outflow of capital from the region. Prior to that, Tokyo intervened to combat the yen’s declines in 1991-1992.

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Reporting by Tetsushi Kajimoto and Leika Kihara; Additional reporting by Kantaro Komiya and Daniel Leussink; Editing by Kim Coghill

Our Standards: The Thomson Reuters Trust Principles.

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