Japan’s policymakers remain cautious as the yen approaches the intervention threshold.

Japan’s Policymakers Hold Fire as Yen Weakens

By Kevin Buckland

TOKYO ​(Reuters) – As ​the yen slid past 145 per dollar with barely a murmur from Japanese policymakers during recent days, suspicion grew that they ⁣won’t be as quick​ to ⁤order intervention as they were last year as they now reap some⁣ benefits from a weaker currency.

Surging exports helped⁢ economic ⁤growth hit ‌6% on an annualised basis in the second quarter, and lower global oil prices have helped keep a lid on the import bill.

But a key factor behind the yen’s weakness is unchanged, namely the yawning yield gap with the United States. ‍The⁢ Bank of Japan is taking baby steps away from its ultra-loose monetary policy, and there are‌ increasing hopes ⁢that U.S.‍ rates may have peaked, but ​as of now, the bond market provides a good reason to sell yen.

Yet currency traders remain nervous about provoking intervention, as the yen entered the same ⁤zone that triggered heavy ⁢dollar selling by Japanese⁢ authorities in September and October of last year.

Finance Minister Shunichi Suzuki issued a reminder on Tuesday against causing volatility in the exchange rate, as the ‍

yen struck a 9/1-2⁣ month low of‍ 145.60 in Asian trading.

Suzuki warned that rapid‌ moves are “undesirable” and the ‍government is “ready to respond appropriately,” while reiterating that ⁣no specific levels are targeted for intervention.

Officials had been a lot more vociferous ‍in June​ when the yen weakened past ⁢144, and their subdued response to the latest depreciation was interpreted by market participants as a‌ sign that Tokyo will tolerate a bit more weakness ‌so ⁢long as speculators didn’t push it too fast.

“The pain associated with the 145-150 level is less ⁤now for the economy, so ⁢I don’t think they’ll be quite as aggressive as they were last year,” said ‌Aaron Hurd, a senior portfolio manager at State Street Global Advisors in Boston.

If the uptrend for‍ the dollar-yen rate is gradual, intervention isn’t likely until “around 150 or a little bit above,” he said.

For now, traders are testing the⁤ waters by selling⁣ the yen against sterling and ⁢the Swiss franc, mindful that selling against the dollar could gather momentum quickly.

NO IMPERATIVE TILL​ 150

Japan spent more than 9 trillion yen ($62 billion) intervening in currency markets⁢ last year to arrest the yen’s decline, buying yen in ‌September and October – first at levels around 145 and⁣ again at‍ a 32-year low just short of 152.

At the end of⁣ August last year,​ the price of Brent crude oil was about $105 per ⁤barrel, and complaints about the pain ‌from imported energy prices⁢ were in the Japanese press on a ‍daily basis.

“Not only economically, but also ‌politically, yen weakness at that time was a problem, and it clearly impacted the government’s approval​ rating,” said Masayuki Kichikawa, chief‍ macro strategist at​ Sumitomo Mitsui DS Asset Management in Tokyo.

The price ​of Brent is now around $88, and those complaints over imported fuel have faded into memory.

From a purely macroeconomic perspective,⁤ Kichikawa said, officials​ have no​ imperative to⁤ prevent yen weakness before⁣ 150, which is consistent with the mild inflationary pressure that ​the BOJ aims ⁢to foster.

The bond market, which precipitated the yen’s slide, may ultimately give Japan’s authorities reason to hold off on pressing the‍ intervention button.

Should the lynchpin 10-year U.S. Treasury yield stabilise not far above 4%, and Japanese yields rise towards⁣ the BOJ’s new 1% cap, Japanese authorities​ may be inclined to let⁤ market forces perform a gradual recovery in the ⁣yen as the yield gap closes.

“The policy‌ divergence ‌story is going to turn, if it hasn’t already,” said Shinichiro Kadota, a currency strategist at Barclays in Tokyo. “The risk of intervention definitely increases above ‍145, but the urgency is less.”

($1 = 145.4900 yen)

(Reporting by Kevin Buckland and Saqib Iqbal Ahmed; editing by Simon Cameron-Moore)

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