Will the Bank of Japan take action? When will we take action?
On Tuesday local time, former head of monetary policy in Japan, Hiroshi Koizumi, stated that if the yen weakens further, the Japanese government will be on the brink of intervening in the currency. "In the absence of any changes in interest rates in the United States and Japan, the depreciation rate of the Japanese yen against the US dollar is quite fast. If this trend continues, intervention will come," said Hiroshi Kuzawa
Koizumi Koizumi believes that the Bank of Japan may raise interest rates again as early as July, and may raise rates again later this year.
The Japanese yen is weak, but the real economy has improved
On March 19, 2024, the Bank of Japan announced its March interest rate decision, ending a 17 year era of negative interest rates. The benchmark interest rate was raised from -0.1% to 0% to 0.1%, while also ending the yield curve control policy. However, since the Bank of Japan raised interest rates in March, the yen has fallen below 150 against the US dollar, hovering around a 34 year low.
Although the weakness of the Japanese yen has intensified price pressure on businesses, the main indicators of Japanese manufacturing and service industry activity improved to their highest levels in nearly a year in April. Economists say that Japan's tolerance for inflation is increasing.
According to data released by Standard&Poor's Global Report on April 23, Japan's Markit Composite PMI in April rose from 51.7 in March to 52.6, the highest level since August last year. The initial value of Japan's manufacturing PMI and Markit service PMI in April were 49.9 and 54.6, respectively, the highest level since May last year (an index above 50 indicates expansion).
(Source/S& P Global, Bloomberg)
The continued promotion of economic growth by the service industry is good news for the Bank of Japan, as price growth is spreading widely throughout the economy but has not led to a significant decline in economic activity.
The S&P Global Report states, "The rise in material, energy, and wage costs is a key reason for the increase in average cost burden, and the weakening of the yen has also played an important role. As a result, companies are shifting the rising costs to customers, resulting in the fastest increase in average expenses in a year."
A strategist at JPMorgan Securities said, "When the yen depreciates above 152 yen to 1 dollar, consumption will face downward pressure; when it exceeds 157 yen, people will realize that real wages are difficult to rise, leading to negative sentiment towards the Japanese stock market." As expectations for a US interest rate cut gradually fade, the likelihood of this happening is increasing. The latest data from Wind Market shows that the Japanese yen has broken through the 152 mark against the US dollar, approaching 155.
Is the Bank of Japan about to intervene?
Former head of monetary policy in Japan, Masahiro Koizumi, stated on Tuesday that if the yen weakens further, the Japanese government will be very close to intervening in the currency. "In the absence of any changes in interest rates in the United States and Japan, the depreciation rate of the Japanese yen against the US dollar is quite fast. If this trend continues, intervention will come," said Hiroshi Kuzawa
At the time of this former monetary policy executive's statement, the Japanese yen hit a new low of 154.86 against the US dollar. Earlier that day, Japanese Finance Minister Toshiichi Suzuki stated that the authorities were ready to take action to address the current situation.
The Bank of Japan is scheduled to hold an interest rate resolution meeting on Friday this week. Manhiro Koizumi believes that the Bank of Japan may raise interest rates again as early as July, but he, like almost all economists, predicts that the Bank of Japan will not adjust interest rates this week.
Market participants and policymakers are concerned that Friday's conservative decision, following a historic interest rate hike in March, may trigger another decline in the yen. "Market participants are not allowed to push up exchange rates, and no one believes that letting speculators go is a good idea," said Gu Zeman Hong
Hiroshi Kozawa expects the Japanese authorities to intervene in the market before the yen reaches 160 against the US dollar. Some market participants, such as Bank of America, expect the yen to fall further to 160 against the US dollar.
It is understood that in September and October 2022, when the Japanese yen approached the levels of 146 and 152 against the US dollar, Japan spent approximately $60 billion to intervene in the currency market.
During an interview with foreign media, Hiroshi Kuzawa stated that the main factor behind the recent weakness of the Japanese yen is the interest rate spread between Japan and the United States. The difference in policy interest rates appears to remain unchanged at least until the summer, and the market generally believes that October is the month when the Bank of Japan is most likely to take action again.
"If the price trend rises to 2%, which meets our expectations, we will adjust the degree of monetary easing, which will mean raising interest rates," said Bank of Japan Governor Kazuo Ueda in response to questions in parliament on Tuesday local time
