(Bloomberg) -- Japan said it stepped into the foreign exchange market twice last quarter, as speculation grows that more moves may be brewing given the recent bout of renewed yen weakness.
The Ministry of Finance intervened on July 11 and 12, spending ¥3.17 trillion ($20.7 billion) and ¥2.37 trillion respectively to prop up the yen, according to the daily breakdown data for the quarter ended September released Friday. Before the government took action in July the yen was trading past 160 per dollar, a 38-year low, partly driven by speculators betting on the wide borrowing cost gap between Japan and the US.
Friday’s report also confirmed that no additional smoothing operations were carried out beyond those two dates. Earlier Bloomberg analysis suggested the government likely sold US Treasuries to finance a large portion of the actions.
Japanese authorities have stayed out of the market since then, as the yen gained some ground against the dollar amid a narrowing of interest rate differentials between Japan and other nations. On July 31 the Bank of Japan hiked its benchmark rate to 0.25%, while the Federal Reserve and other major central banks have pivoted toward cutting rates to shore up their economies.
But following Donald Trump’s victory in the US presidential election Tuesday, the greenback has surged against a range of currencies around the world, and the yen is once again at risk of further softening. On Friday it was trading around 153 to the dollar, near the weakest it has been since July.
Wall Street is betting that Trump’s presidency could result in policies that strengthen the dollar, as tariffs on US trade partners and tax cuts at home could drive inflation and higher interest rates. But considerable uncertainty remains surrounding Trump’s various policies and its potential impact on currency trends.
Some economists suggest that under a Trump administration starting January, Japan may find it easier to persuade the US that currency interventions are necessary, given the president-elect has spoken in favor of a weaker dollar in the past.
“Trump’s stance might be ‘well done on intervening’ if Japan stops yen weakness,” said Atsushi Takeuchi, Chief Research Fellow at Ricoh Institute of Sustainability and Business. “From his perspective, the US doesn’t have to spend anything — the Japanese are doing it for him.”
Others argue that Japan may in fact struggle. The US could demand conditions from Japan before agreeing to dollar selling operations that could potentially exacerbate inflation in the US, according to Tohru Sasaki, chief strategist at Fukuoka Financial Group Inc.
“Trump might say, if you want to intervene, buy some fighter jets,” Sasaki said. “The Japanese government is likely to remain weak for some time so it might not be able to respond to that sort of condition. So there could be a higher hurdle for intervention.”
Meanwhile Japan’s chief currency official Atsushi Mimura ramped up verbal warnings on Thursday by saying that the government will monitor markets with extreme urgency, and will take action against excessive moves. Those comments followed the yen weakening toward 155 against the dollar.
Economists surveyed by Bloomberg ahead of October’s central bank meeting said that if the yen were to hit 160 against the dollar, it could prompt further currency intervention from the government.
In such a scenario, coordinating with key international partners including the US will likely be critical. Major economies generally maintain that currency values should be determined by market forces, and US Treasury Secretary Janet Yellen has repeatedly said currency intervention should be a seldom-used tool and officials should give fair warning in advance. While she has not criticized Japan’s recent interventions, her comments highlight the general international stance against frequent or aggressive currency intervention.
At almost all recent international conferences, Japan has emphasized the Group of 20’s stance that excessive and disorderly movements in exchange rates could have a destabilizing effect on global economic and financial stability. That’s likely an attempt to justify both earlier and potential future actions in response to such risks.
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