EDITORIAL | As Exchange Rate Fluctuates, Keep an Eye Out for Speculation

It was as if adding fuel to the fire of yen depreciation. On April 29, the exchange rate plummeted to the 160-yen-to-the-dollar range. At that point, the value of the yen sharply reversed course and abruptly rose to 154 yen per dollar. The turnaround suggested to many observers that the Japanese government and the Bank of Japan (BOJ) had intervened in foreign exchange markets to support the yen. 

Market watchers estimated that a mammoth market intervention of around ¥5 trillion JPY ($32.68 billion USD) had taken place. It likely was meant to be a "covert intervention" since the Ministry of Finance has not disclosed whether it intervened. 

Since the action took place on a holiday in Japan, the Tokyo markets were closed. Furthermore, the volume of yen-dollar transactions tends to be rather low in overseas forex markets. Therefore, price fluctuations tend to become quite volatile on such occasions. 

If speculators sought to take advantage of this situation to drive the value of the yen down, then naturally their ploy needed to be dealt with decisively.

Excessive depreciation in the value of the yen increases the burden on household budgets and businesses. That is because it causes higher import prices. 

It is therefore essential that the authorities adopt a firm stance and not allow excessive exchange rate fluctuations. Hopefully, they will keep an even sharper eye out for speculation. 

Role of the Bank of Japan

There was a BOJ Monetary Policy Committee meeting on April 25 and April 26. Resulting awareness of the difference in monetary policies between Japan and the United States seems to have greatly impacted the acceleration in the yen's depreciation versus the dollar. 

At the time of the meeting, BOJ Governor Kazuo Ueda made remarks in a press conference. Specifically, he said that at the moment the decline in the value of the yen was "not having a major effect" on rising prices. 

Statements like that led to a growing perception that the BOJ was still far from ready to raise interest rates. That led to a surge in dollar purchases and yen sales to take advantage of the high US interest rates. 

Interest rate hikes are garnering attention, and not only because of the desire to move the forex markets. Another reason is to respond to influences from the actual economy and prices. 

Nonetheless, in the current situation, BOJ trends can spark forex transactions. Therefore, great care must be taken when disseminating information. The BOJ should remind itself of that fact. 

Verbal Intervention in the Currency Markets

Up to now, the Japanese government has continued to exercise "verbal intervention." It had reiterated that it would not stand by in the face of excessive depreciation in the value of the yen. However, it took no concrete action to halt the trend.

If Japan's financial authorities did actually move this time, it can be judged a calculated move to show traders that it would not allow the yen to weaken further.

Truthfully, however, it would be extremely difficult to fundamentally reverse the trend of a weaker yen and a stronger dollar. The BOJ is maintaining an accommodative financial climate. However, with its robust economy showing no sides of flagging, the US is not likely to lower interest rates. At least not for some time. As long as this paradigm holds fast, the impact of interventions will remain limited.

The trend of yen depreciation continues. On May 1, the yen-dollar exchange rate in the Tokyo market was hovering around 157 yen to the dollar. Hopefully, the Japanese authorities are staying in close touch with their US counterparts. They must take into account the outcome of the Federal Reserve's Open Market Committee meeting that ended May 1 and other factors. 

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(Read the editorial in Japanese.)

Author: Editorial Board, The Sankei Shimbun