Japan warns against volatility as the yen falls to its lowest level in 24 years

Image: Reuters Berita 24 English - Thursday was the first time in 24 years that the dollar was worth more than the yen . This caused policym...

Image: Reuters

Berita 24 English - Thursday was the first time in 24 years that the dollar was worth more than the yen. This caused policymakers to warn that they would be watching currency moves with a "high sense of urgency." They used strong language to hint that they might have to get involved in the market at some point.

As investors got ready for more aggressive interest rate hikes by the U.S. Federal Reserve, which would make the yen less attractive, the value of the yen fell to 139.69 per dollar, a level not seen since 1998.

"Recently, the volatility of the currency market has been getting worse," Chief Cabinet Secretary Hirokazu Matsuno told reporters, echoing a senior Ministry of Finance official's worries.

"Sudden exchange-rate fluctuations are not desirable. Matsuno added, "It's important for currencies to move in a stable way that reflects their fundamentals."

These kinds of statements are meant to make traders nervous by giving the impression that the government might get involved in the foreign exchange market, for example by selling dollars for yen to support the yen. There is, however, no clear sign that Japan can do something like this right away.

Since the beginning of this year, the yen has dropped from around 115 yen to the dollar. This is mostly due to the big difference between U.S. interest rates and the Bank of Japan's extremely low rates.

When the yen was weak, it was good because it helped boost exports. Now, though, the weak yen is becoming a problem for Japanese policymakers because it makes fuel and raw materials that are already expensive to import even more expensive.

"The weak yen could hurt corporate profits and consumption by making the prices of imported goods go up," said Nobuyasu Atago, chief economist at Ichiyoshi Securities.

He said, "Further drops in the yen are bad for Japan's economy and could stop its recovery from the damage caused by the pandemic."

Analysts say that if the dollar/yen goes above the psychologically important level of 140, it could put more political pressure on Prime Minister Fumio Kishida to spend more money to help the economy deal with rising living costs.

Even though a further drop in the yen could be bad, Japanese policymakers don't have much they can do right now to stop it from falling, other than trying to scare the markets.

To support the yen, Tokyo would have to get informal permission from the other G7 countries. Given Washington's dislike of currency intervention, it would probably be hard to get approval.

Analysts also say that the US has little reason to stop the rise of the dollar, which helps ease inflationary pressures.

Higher interest rates can also help a currency, but the Bank of Japan has little reason to raise Japan's since inflation is low and the economy isn't doing well.

Atsushi Takeda, chief economist at Itochu Research Institute, said, "The yen might stop falling if the Bank of Japan says it plans to raise interest rates or if the Ministry of Finance says it's ready to step in on the currency market."

"But neither of these options is realistic or necessary because there isn't much room for long-term interest rates in the U.S. to rise and relieve pressure on the dollar."