Gao Zhanjun: Why Japan's Currency Intervention Failed (AI Translation)

【周刊提前读】高占军专栏：日本干预汇率为何失败

The yen exchange rate has exhibited significant fluctuations, with notable surges in June and subsequent months. On June 26, 2023, the USD/JPY exchange rate increased by 0.63% to 160.72, surpassing the previous peak of 160.17 set on April 29, which had prompted official intervention [para. 1]. Japanese authorities have spent 9.8 trillion yen on interventions, exceeding 2022's expenditure of $60 billion, but these measures have not stabilized the yen. The exchange rate continued to deteriorate, reaching 161.92 on July 3, marking its lowest point since December 1986 [para. 2].

On June 28, the yen breached the critical 161 mark for the first time, coinciding with the resignation announcement of Masato Kanda, the Vice Minister of Finance for International Affairs. This added to market skepticism about the effectiveness of yen interventions [para. 3][para. 4]. The rapid depreciation of the yen is linked to the Bank of Japan's (BOJ) monetary policies, which have maintained loose financial conditions. For instance, following a BOJ meeting on April 26 that kept interest rates unchanged, the yen depreciated significantly [para. 5]. BOJ Governor Kazuo Ueda suggested that yen depreciation could boost demand and benefit the economy, downplaying its potential to cause inflation [para. 6].

Prime Minister Fumio Kishida, concerned about the yen's excessive depreciation and its adverse impact on citizens and small businesses, influenced Ueda to adopt a more cautious stance on the exchange rate [para. 7]. Despite expectations, a BOJ meeting on June 13-14 did not provide specific details on reducing government bond purchases, suggesting potential delays in policy normalization. This uncertainty led to a continued decline in the yen's value [para. 8], partially due to the still uncertain economic prospects constraining Ueda’s actions [para. 9].

Economists at Kyoto University share a cautious view, noting the economy's limited capacity to endure monetary tightening. Despite some positive indicators like low unemployment and rising nominal wages, real wages have been negative for 24 consecutive months, and private sector spending has declined for four quarters [para. 10]. Japan's GDP contracted in the third quarter of 2023 and the first quarter of 2024, with the latter's contraction figure revised from 1.8% to 2.9% as of July 1, 2024 [para. 11].

The disparity in monetary policies between the U.S. and Japan has caused a surge in yen-dollar carry trades, making foreign capital inflow more cautious and adding pressure on the yen [para. 12]. Additionally, ongoing U.S. presidential election debates, which began on June 27, have introduced further volatility in the yen's exchange rate due to fluctuating expectations around the election outcomes [para. 13].

This summary outlines the key factors contributing to the yen's recent fluctuations, the effects of Japanese monetary policy, and the broader economic context impacting the exchange rate. The perspectives of policymakers and economists are also highlighted, emphasizing the complexity and challenges in stabilizing the yen under current economic conditions.

This information is based on the article titled "Column｜Why Did the Yen Intervention Fail?" from Caixin Weekly, published on July 7, and written by Gao Zhanjun, a Senior Research Fellow at the National Institute for Finance & Development (NIFD).