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Japan spent a record ¥9.8tn ($62bn) from late April to May to boost the yen, but the currency has resumed its slide towards 34-year lows even as expectations build for interest rate rises, highlighting the struggle Tokyo faces to stabilise its exchange rate.
With currency interventions having only a fleeting effect on the yen, analysts said the Bank of Japan faces a “huge dilemma” as it comes under pressure to raise rates at a faster pace while the economy remains weak due to sluggish consumption.
The figure, released by the finance ministry on Friday, covers the period from April 26 to May 29 but market participants say they believe the amount was mostly spent over the course of four days starting from April 29 when Japan conducted its first yen-buying intervention since late 2022.
In the days after the sale of dollar reserves to purchase the Japanese currency, the yen briefly strengthened to ¥151.85 to the US dollar after falling below ¥160 in late April. But the yen was trading at ¥157.31 on Friday as investors continued to focus on the yawning gap between borrowing costs in Japan and the US.
With the Federal Reserve expected to keep rates “higher for longer” while Japan’s rates remain near zero, traders said the yen continued to be a favourite global currency for the “carry trade”, where the cheaply borrowed yen is used to fund investments in other higher yielding assets.
Meanwhile, the yields on 10-year Japanese government bonds hit 1.1 per cent on Thursday — the highest level since July 2011, with expectations rising that the Bank of Japan will announce plans to reduce its purchases of government debt when it holds its policy meeting in June.
In March, the central bank made a historic shift in its ultra-loose monetary policy by ending eight years of negative rates. Earlier this month, the BoJ also surprised markets by buying a smaller than expected amount of five- to 10-year Japanese government bonds during its regular operation.
In a speech earlier in the week Shinichi Uchida, the BoJ’s deputy governor, sent hawkish signals to investors, saying Japan was close to overcoming decades of deflation.
“While we still have a big challenge to anchor the inflation expectations to 2 per cent, the end of our battle is in sight,” he said, pointing to wage increases and structural changes to the country’s labour market caused by a shortage of workers.
But while investors are building their bets that the BoJ will further tighten policy, those expectations have done little to reverse the yen’s stubborn weakness.
“It will be hard for the Japanese side to bring the yen higher unless investors think that interest rates will seriously begin to rise,” said UBS economist Masamichi Adachi. That would mean that the BoJ will need to raise its rates by more than a percentage point in 2024 — a pace Adachi said was unsustainable due to weak domestic demand as a result of higher living costs.
“The BoJ is underestimating the weakness of the economy. It’s a huge dilemma,” he said.
