Japan's intervention in the foreign exchange market may be closer than many investors expect, as the yen continues to slide towards the level of 160 yen per US dollar.
A member of a Japanese government advisory panel suggested that Japan’s intervention in the foreign exchange market may come sooner than many investors expect, as$JPY/USD (JPYUSD.FX)$the exchange rate continues to slide toward the level of 160 yen per US dollar.
"Japan holds such vast foreign exchange reserves," said Takuji Aida, Chief Economist at Crédit Agricole, during an interview on Thursday, referring to the potential funds the Japanese government might use if it intervenes in the currency market. "Under Prime Minister Sanae Takagi’s administration, it is easier for people to believe we should indeed utilize these reserves."
The remarks were made after$JPY/USD (JPYUSD.FX)$the exchange rate fell below 157 on Thursday, hitting its lowest level since January. The last time Japanese authorities intervened was in July 2024, when the yen-to-dollar exchange rate reached the 160 level; this threshold is now widely considered by the market as likely to trigger a new round of interventions.
Aida stated that if exchange rate fluctuations "become severe," authorities might intervene in the market before the yen reaches that threshold.
Factors weighing on the yen include market speculation that Prime Minister Sanae Takagi’s stimulus-focused policies may prevent the Bank of Japan from raising benchmark interest rates in the short term, while expectations of Federal Reserve rate cuts have cooled, implying that US interest rates may remain high, widening the interest rate differential and pressuring the yen. Therefore, Aida believes the Bank of Japan will act in January. He noted that if the central bank were to raise rates in December, "it would be perceived as lacking coordination with the government."
Aida, along with other reflationists, was appointed to Japan’s growth strategy committee, further reinforcing market perceptions that Prime Minister Takagi will favor increased fiscal spending and a slower pace of interest rate hikes by the Bank of Japan. Even though Takagi is expected to announce Japan’s largest supplementary budget since the pandemic on Friday, Aida still believes this prime minister will push for another economic stimulus package in spring or early summer next year.
Aida stated that maintaining a "high-pressure economy" and actively supporting corporate investment are two pillars of Prime Minister Takagi’s "responsible and expansionary fiscal policy."
Aida believes Japan’s fiscal situation has significantly improved and supports continuing to provide economic support. According to his mark-to-market calculations, Japan’s net debt-to-GDP ratio has decreased from 133% to 85% over four and a half years. This implies that the scale of reserves Japan needs to maintain fiscal stability no longer needs to be as large as before.
According to the documents, Sanae Takaichi’s larger-than-expected package aimed at addressing inflation and resolving national security issues will be funded by a supplementary budget of 17.7 trillion yen. Aida estimates that the total amount of new bonds issued to finance the latest economic package will be slightly less than 10 trillion yen.
Aida stated that the rationale for compiling another stimulus package next year stems from the upcoming fiscal year's budget initiated by former Japanese Prime Minister Shigeru Ishiba. This implies that the annual budget will not fully reflect Sanae Takaichi’s policy priorities, thus necessitating the formulation of an additional supplementary budget shortly after the annual budget is approved by parliament in March, he added.
As for the Bank of Japan, Aida noted that if the central bank indeed raises borrowing costs in January, it may subsequently pause its rate hike cycle for about a year to align with the government’s pro-growth stance before resuming tightening until interest rates reach approximately 2% as the terminal level.
“It’s as if the Bank of Japan has cleared the way,” he said, referring to the January meeting.
Amid these recent developments, Japan’s 10-year government bond yield has climbed to 1.8%, its highest level since 2008. While some analysts attribute this to growing concerns over the fiscal situation, Aida stated that the rise in yields reflects market optimism towards the Japanese economy.
“It’s best to view the rise in yields as the market pricing in the possibility of higher terminal rates,” Aida said, countering market rumors suggesting that investors are “selling Japan.”
Editor/melody