Jamie McGeever
ORLANDO, Fla. (Reuters) – The yen’s fall below 150 to the dollar has prompted warnings from Japanese officials that the pace of devaluation is “excessive” and “undesirable,” but a repeat of frenzied intervention buying of the yen in 2022 appears unlikely.
Tokyo may not intervene at all.
Its tolerance for a weaker exchange rate may be higher now than it was then, lower yen volatility indicates a fairly relaxed currency market, and US-Japan yield spreads are likely to narrow rather than widen from here.
In Japan, inflation has peaked and is falling, pipeline pricing pressures have eased significantly, the economy is in recession, and the country’s terms of trade have improved compared to 2022.
Moreover, the Bank of Japan still appears to be on track to end negative interest rates soon, so a “natural” reversal in the yen’s value is quite possible.
Globally, while uncertainty may be increasing about the timing and magnitude of the next interest rate changes from the Federal Reserve, European Central Bank and Bank of England, they will almost certainly be lower.
None of this indicates the urgent need for Japanese policymakers to intervene in the market, spending tens of billions of dollars, to prevent the yen from reaching new all-time lows of 152 to the dollar.
DO NOT RUSH
Of course, they may want to prevent the yen from sliding into a more damaging sell-off that threatens the functioning of Japanese financial markets. It has already fallen as much as 6% against the dollar this year.
But a repeat of September and October 2022, when Japanese authorities bought yen on the foreign exchange market for the first time since 1998 and in record quantities, is a distant prospect.
Annual consumer inflation at the time was over 3% and rising, and producer price inflation was a staggering 10%. Although authorities have tried for years to avoid deflation, an exchange rate/import price spiral has never been a desirable alternative.
Inflation is close to the Bank of Japan’s 2% target and slowing, and producer price inflation has all but disappeared. Morgan Stanley analysts say Japanese trading conditions are not as bad as they were 16 months ago and import costs are nowhere near as high.
It comes amid surprise news that the economy has fallen into recession, meaning Japan is no longer the world’s third-largest economy.
Will policymakers be willing to appreciate the exchange rate that currently gives the export-led economy a route out of recession, boosting corporate profits and thereby increasing the prospect of the higher wages they want to see?
“We suspect that the Kishida administration… will not be in much of a hurry to contain the yen’s decline and thereby risk depressing corporate profits,” Morgan Stanley’s Koichi Sugisaki wrote on Sunday.
DECENT CURRENCY MARKET
If the domestic situation suggests less need for Japan to intervene on a large scale to buy yen, the same applies to the international picture.
In 2022, the Fed pursued its most aggressive rate hike campaign in 40 years, and US-Japanese yield spreads widened sharply. The rise of the dollar above 150.00 yen coincided with a sharp increase in the difference in exchange rates.
Thus, the intervention may have been contrary to these fundamentals, but was understandable in terms of the desire to prevent the yen selling mania from getting out of control.
Today, the Fed is almost certainly at its peak, US bond yields are more balanced, and the Bank of Japan is close to taking off. The yen could benefit from a natural narrowing of the gap between US and Japanese bond yields without official pressure.
The risk for the Bank of Japan is that its G4 peers won’t cut rates as quickly or as much as predicted. The yen could come under downward pressure again, testing the central bank’s resolve to intervene.
But now the currency markets seem completely relaxed. Although the yen’s weekly decline this year is a one-sided market that Japanese officials want to avoid, the yen’s fall has been anything but volatile.
One- and three-month dollar-yen implied volatility is at three-month lows of about 7% and 8%, respectively, notably lower than in September and October 2022.
“The risk of significant intervention remains modest,” said Mark Chandler, managing director of Bannockburn Global Forex.
(The views expressed here are those of the author, a Reuters columnist.)
(Jamie McGeever; Editing by Paul Simao)