【MACRO Insight】The Historical Low of the Japanese Yen Exchange Rate - The Complex Interaction of Government Intervention and Central Bank Policies

The Japanese government is ready to intervene in the currency market at any time to stabilize the yen, despite facing pressure from the United States' currency watch list. As the yen exchange rate approaches its historical low, the government has implemented large-scale intervention. The Bank of Japan is considering raising interest rates when the inflation rate rises to 2.5%, but there is disagreement within the bank. The depreciation of the yen has a positive impact on inflation, but it also increases household costs. The central bank plans to assess economic challenges and may announce a reduction in bond purchases at the end of next month, which has sparked market speculation about the scale of quantitative tightening.

Japan's Deputy Finance Minister, Makoto Kanda, clearly stated that the Japanese government is always ready to intervene in the currency market 24 hours a day to address excessive yen fluctuations. He pointed out that despite the United States placing Japan on the currency watch list, it has not affected Japan's currency strategy. Kanda emphasized that if the yen fluctuates excessively, it could have a negative impact on the Japanese economy, and therefore, the Japanese government is prepared to take appropriate measures when necessary.

At the end of April and the beginning of May, the yen's exchange rate against the US dollar approached its lowest point in 34 years at 160.17, prompting the Japanese government to take unprecedented intervention measures to support the yen. Kanda revealed that Japan invested 9.8 trillion yen (approximately 61.3 billion US dollars) in the currency market from late April to late May over the course of a month, without disclosing the specific dates of intervention. Market analysis suggests that Japan may have sold US Treasury bonds to raise funds for intervention.

In the meantime, Japanese retail investors are full of expectations for the government's intervention measures, with many betting on a rebound in the yen. Data from the Tokyo Financial Exchange shows that since mid-May, the bullish positions of the yen against the US dollar in futures contracts aimed at Japanese individual investors have been increasing.

However, attempting to profit from government intervention is a high-risk strategy. In April and May, some investors suffered significant losses due to market fluctuations, but others made huge profits through accurate market judgment. For example, a 58-year-old Singaporean retail investor, Keisuke Okawa, made a profit of about 1.5 million yen (approximately 9,400 US dollars) through cross-currency trading amidst market volatility. On the other hand, a 41-year-old Tokyo foreign exchange trader, Hayato Imaizumi, suffered a loss of 80% to 90% in his currency investment due to a misjudgment of market trends.

Kanda also mentioned that Washington's peers have no objections to Japan's intervention measures, as they place more emphasis on transparency. Despite Japan being placed on the US Treasury Department's watch list for foreign exchange transaction behavior, Japan will continue to take appropriate measures to address any excessive fluctuations in the yen.

At the Bank of Japan's monetary policy meeting in June, some officials called for an interest rate hike to counter the increasingly apparent risk of rising inflation. Among them, one policymaker particularly advocated for an immediate rate hike to guard against the risk of inflation exceeding expectations. There is a divergence of expectations in the market regarding the Bank of Japan's rate hike; some predict the central bank may raise rates in July, while others believe the rate hike might be postponed until later in the year.

The officials of the Bank of Japan discussed the impact of the recent depreciation of the yen on inflation forecasts and whether it is necessary to adjust the policy interest rate during the meeting on June 13th and 14th. Some officials believe that if the risk of rising prices intensifies, the central bank should immediately raise the policy interest rate. However, there are also officials who are cautious, arguing that it is necessary to further observe whether wage growth can boost consumption.

In May, Japan's inflation rate reached 2.5%, exceeding the central bank's 2% target. This prompted the central bank to hint that it might adjust short-term interest rates to between 1-2% to maintain an economy that is neither overheating nor cooling down. The central bank showed a stronger awareness of the intensification of inflationary pressures at the June meeting, which may prompt them to discuss the interest rate hike issue at the next policy meeting on July 30th and 31st.

However, the weakness of the yen has also added complexity to the policy decision-making of the Bank of Japan. On one hand, the depreciation of the yen helps to maintain the inflation rate above the target; on the other hand, the rise in the prices of imported goods increases the living costs of households, affecting consumption. Some officials of the central bank believe that monetary policy should be based on an assessment of trend inflation and progress in wages, rather than being influenced by short-term fluctuations in the foreign exchange market.

Additionally, the Bank of Japan is also facing unexpected factors such as weak consumer spending and safety scandals in the automotive industry, which have impacted the economy. The central bank has stated that it will assess these factors and formulate a specific plan to reduce bond purchases by the end of next month as the first step in quantitative tightening.

One member of the central bank suggested that the June meeting should not decide on a specific bond purchase reduction plan, but rather collect opinions from market participants before making a decision. Another member, Kazuo Ueda, hinted that the reduction might be quite substantial, sparking market speculation about the possible scale of the cut.