The Dwindling Chance of BOJ Intervention
The USDJPY is back in the 150 range, after a dramatic reversal from where it nearly touched the 150 handle. But it wasn’t thanks to anything the BOJ or Japanese authorities did. It’s just that the dollar got weaker even faster, thanks to US CPI figures coming in below expectations.
Which means that the trends in Japan that caused the currency to weaken are still in place. Which opens an important question: Why isn’t the BOJ doing anything about the currency? Last year, the Japanese government stepped in at this point to keep the currency from falling too much. It had been flirting with resistance at 150 (which has now turned into support) in anticipation that something might happen beyond that point. But, as of yet, still nothing.
It’s Not The Fall, It’s How It Fell
The main issue is the pace. Last year, the USDJPY went from a floor of 103 all the way up to 150 in a matter of 11 months (from December of 2021 to October of 2022). That is a depreciation of over 43% in less than a year. At the time, many currency officials did say that they were worried about how fast the currency was depreciating.
It’s over a year since the intervention happened, and the currency is at the same level as before. But what has changed is the pace. Because the time is more than doubled, the rate of decrease in the strength of the yen has halved. It’s just over 20% per year, which is still a break-neck speed. But, it’s a lot closer to what Japanese officials might consider acceptable.
Weakness Is a Good Thing?
The thing is, generally speaking, officials like a weaker currency. It helps exports, which is important for a country that is export-reliant like Japan. That the currency is at the current levels isn’t so much of a problem for Japanese policymakers, generally speaking. The weaker yen is so beneficial to Japan, as a matter of fact, that the country has been accused of currency manipulation. Evidently Japan denies the charges.
A rapid drop in the relative value of the currency does, however, increase inflationary pressures. Which is something the BOJ could be worried about. But, if inflation remains constrained within a certain “acceptable” level, then the weaker yen could be understood as “good” from the perspective of authorities. Therefore, they aren’t motivated to do something about it. And, as time goes on, the urgency to intervene drops.
BOJ Keeps Trying to Run Out the Clock
The other thing is that what will definitely halt the weakness in the yen is the BOJ moving away from ultra-easing. It seems that they are in the process of doing that very, very slowly. Which allows for weakness in the currency in the meantime.
But, as the day of rate liftoff approaches, the risk of the currency becoming too weak diminishes. And, the BOJ will be moving into a tightening bias while other central banks are likely to be moving to an easing bias. Weakness in the yen now might actually be in the BOJ’s favor in order to prevent it from becoming too strong later.
It’s projected that the BOJ will start raising rates after March, when its study on the impact of tighter policy is completed. In the meantime, Japanese officials and the BOJ might look to keep the currency in line with “warnings”, in an effort to keep the market from throwing them off their determined slow move towards tightening.