In response to recent rapid and speculative-driven movements in foreign exchange rates, Japan’s top currency diplomat, Masato Kanda, issued a warning on Tuesday, suggesting that the government may consider taking action to address disorderly market conditions. Kanda, who serves as Japan’s vice minister of finance for international affairs, emphasized the importance of exchange rates remaining stable in accordance with economic fundamentals. However, he highlighted the potential necessity for government intervention when excessive fluctuations or disorderly movements occur due to speculation.
“Preferably, exchange rates should remain stable based on fundamentals. When the market operates smoothly in this manner, government intervention is unnecessary,” Kanda stated during a press briefing. “Nevertheless, if speculative activity leads to excessive volatility or disorderly movements, indicating market dysfunction, the government may find it necessary to intervene appropriately. We will maintain a firm approach consistent with our past actions.”
Last week, Tokyo was suspected of intervening on multiple occasions to bolster the yen after it plummeted to levels not seen in over three decades. Data from the Bank of Japan suggests that authorities expended over 9 trillion yen ($58.4 billion) to support the currency, resulting in a significant rebound from a 34-year low against the dollar to a one-month high within the span of a week.
The reluctance to intervene extensively in the currency market stems from concerns about Japan’s limited dollar reserves and recent remarks from U.S. Treasury Secretary Janet Yellen, who suggested that such interventions should occur only under exceptional circumstances. Hideo Kumano, chief economist at Dai-ichi Life Research Institute, noted that Kanda’s early verbal warning might aim to stabilize the exchange rate around the lower 150 yen level against the dollar, at least until the release of U.S. consumer price index data in mid-May.
While a weaker yen benefits Japanese exporters, it poses challenges for policymakers, as it raises import costs, contributes to inflationary pressures, and squeezes household budgets. Despite the Bank of Japan’s decision to abandon negative interest rates in March, the yen has faced downward pressure amid rising U.S. interest rates and Japan’s near-zero rates. This has prompted investors to seek higher yields elsewhere, intensifying pressure on the yen in recent months.
Kanda highlighted that Japan is not alone in its concerns about foreign exchange market volatility, noting that several countries, including members of the Association of Southeast Asian Nations (ASEAN) as well as China and South Korea, expressed similar apprehensions during discussions preceding a ASEAN+3 finance ministers and central bank governors conference in Tbilisi last week.
In the current scenario, where $1 equals 154.1800 yen, Japan remains vigilant amidst ongoing currency fluctuations, underscoring the importance of stable and orderly market conditions in the global financial landscape.