Japan could potentially intervene in support of the yen if it continues to decline, according to former top currency diplomat Takehiko Nakao. He also suggests that it is the right time for the Bank of Japan (BOJ) to abandon or modify its ultra-easy policy settings. Nakao, the former vice minister of finance for international affairs, warns that prolonged monetary easing may further devalue the yen and calls for action to prevent this scenario.
Potential for Intervention on Yen
Nakao believes that there is a possibility of intervention in the currency markets should the yen weaken further. Although some may argue that intervention is not imminent due to the comparatively slower depreciation compared to the previous intervention in September/October, Nakao insists that authorities may still opt for intervention as a measure to counteract any additional weakness in the yen.
In 2020, Japan spent over 9 trillion yen ($60.88 billion) intervening in currency markets by buying yen and limiting its decline. The intervention took place in September and October, with the yen being purchased at levels around 145 and again nearing a 32-year low of 152 against the dollar. Currently, the yen is trading around 147.77 against the dollar.
BOJ’s Ultra-Easy Policy
Nakao, who previously served as the top currency diplomat, oversaw significant intervention in 2011 when the yen strengthened due to the U.S. Federal Reserve’s quantitative easing policies. However, with the current situation involving a weak yen, the benefits for Japanese exports have been offset by the rising prices of imports and the overall cost of living.
Furthermore, the BOJ’s prolonged monetary easing has faced criticism from investors for distorting markets and affecting bank profits. The weakening yen is seen as an outcome of Japan’s deviation from the global trend of tightening monetary policies. While major central banks, including the U.S. Federal Reserve, have increased interest rates as a measure against inflation, the BOJ has maintained its powerful monetary stimulus.
Urgency for Policy Change
Nakao argues that the BOJ should take action promptly by modifying its ultra-easy policy. He suggests that with rising headline inflation and an excessively weak yen, the central bank has no choice but to consider monetary policy normalization, including exiting negative rate policies and yield curve control. By doing so, the BOJ can prevent falling behind the curve.
Nakao, now the chairman of the institute at Mizuho Research & Technologies, remains in close contact with current policymakers. He emphasizes that with stable JGB yields and increasing inflation, the present moment presents an opportunity for the BOJ to adjust its yield curve control.
Overall, Nakao’s perspectives highlight the potential for Japan’s intervention on the yen and the urgency for the BOJ to reassess its ultra-easy policy. It remains to be seen whether these recommendations will be implemented and how they will impact Japan’s currency dynamics and economic stability.
