By Kevin Buckland and Rocky Swift
TOKYO, Jan 27 (Reuters) – The spectre of coordinated yen buying by Tokyo and Washington has propped up Japan’s currency, but history suggests the impact of an actual intervention could be limited, especially because Prime Minister Sanae Takaichi is basing her snap election campaign on expanded stimulus measures.
With a vote for the lower house of Parliament in less than two weeks serving as a mandate on Takaichi’s mission to reflate the economy, Japanese authorities are openly hinting at stepping into the markets for the first time since July 2024.
The yen’s protracted decline this year has become a symbol of the market’s escalating worries over Japan’s financial health. Its relentless march lower has come as Japanese government bond yields have soared to record highs, which would ordinarily be supportive of the currency.
“The currency is reacting aggressively,” said Toshinobu Chiba, a Tokyo-based fund manager at Simplex Asset Management, who believes the yen could spiral to as weak as 180 per dollar for the first time since 1986, a year after the Plaza Accord allowed for a major depreciation of the dollar, if Takaichi scores a big election win and has a mind to expand her stimulus plans.
Chiba, like many market participants, expects dollar-yen levels beyond 160 to trigger an initial round of intervention, “but there’s not so much impact the Ministry of Finance can have on the market.”
That’s because “most investors do not trust Japan’s fiscal control,” he said. “It’s a sovereign credit issue.”
Japan’s government debt already stands at roughly 230% of gross domestic product, the highest in the developed world.
Now Takaichi – along with her main political opponents – has pledged to suspend the consumption tax on food – the source of around 5 trillion yen ($32.36 billion) in revenue a year – without saying how she will make up the shortfall.
Fears of a fiscal blowout came to a head last week, with long-dated JGB yields vaulting to record highs, while stocks suffered their most severe selloff in three months – all while the yen tested record troughs versus the euro and Swiss franc.
A “Sell Japan”-style market rout that is self-reinforcing and spans asset classes is not something Takaichi can afford as she heads into an election. So on Friday, with traders offloading the yen despite hawkish signals from the Bank of Japan, the currency suddenly spiked and then spiked again several hours later, in what appeared to be the result of rate checks from both the BOJ and the Federal Reserve Bank of New York.
From around 159.20 per dollar late in the Tokyo afternoon, the yen ultimately vaulted to as strong as 153.30 per dollar by Friday’s close. It last traded at 154.75 on Tuesday.
Joint action is rare, but it would come at a time when Washington is vocally supportive of a stronger yen against the greenback.
Japan’s top currency diplomat, Atsushi Mimura, has declined to comment on the reported rate checks – a traditional precursor to actual intervention – saying only that policymakers would maintain close coordination with their U.S. peers and respond “appropriately.”
Even with the potential for added firepower, the impact of a yen intervention has limits – and is generally considered a way to slow or smooth currency moves rather than reverse their direction, particularly when there is a clear driver such as a fear of a fiscal catastrophe.
Tokyo spent a combined 15.3 trillion yen on intervention in 2024 – an unprecedented amount – to stem a wave of yen selling as the monetary policy paths of the Fed and the BOJ diverged sharply.
But following a bout of intervention in late April that year, the yen was plumbing new lows less than two months later.
Japan’s next move into the currency markets in July 2024 was more successful, but mainly because it came right ahead of U.S. Federal Reserve Chair Jerome Powell’s unexpected dovish pivot in Jackson Hole, Wyoming, in August of that year.
Today, policymakers are worried not only about the two-year suspension of the food tax; they are also concerned that the levy will be politically difficult to reinstate.
The increases in the consumption tax since 2014, while exceedingly unpopular, have been a big part of what has improved Japan’s fiscal health in recent years, said Chris Scicluna, head of research at Daiwa Capital Markets Europe.
“The snap election is very much crystallising in investors’ minds the risks that Japan’s public finances just are not going to put on a sustainable path,” he said.
“They’ve got some favourable tailwinds” in the long-awaited return of inflation and reasonable economic growth, Scicluna added.
“Unfortunately, the politics is getting in the way.”
($1 = 154.5200 yen)
(Reporting by Rocky Swift; Editing by Thomas Derpinghaus)
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