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How Japan Plans to Support its Currency?

The Japanese government and the central bank are concerned about recent yen declines and are ready to act as needed in currency policy. They released a joint statement on June 10.

After their meeting, The Ministry of Finance, Bank of Japan, and the Financial Services Agency issued a rare joint statement. Government officials from these organizations almost never issue joint statements on changes in currency.

The statement reached the day after the yen dropped to a new 20-year low against by the dollar and a seven-year bottom against by the euro on predictions that the central bank will keep falling behind other significant central banks in phasing down stimulus measures.

As of June 10, the Japanese currency has been a 15% decrease in comparison to the US.

Japan and its problems

In addition to vocal involvement, Japan has a number of methods to stop significant yen losses. The strategy involves taking an aggressive stance in the market by buying up huge amounts of Japanese currency.

Given the country’s high dependence on exports, this organization has historically taken a hands-off approach to fluctuations in the value of the yen, either way.

More than two decades ago, when the financial crisis in Asia caused a yen sell-off and swift capital flight from the area, Japan intervened to support the yen. In 1991-1992, Japan intervened to counter yen falls.

The question is: What would inspire Japan to buy yen again?

Exchange-rate manipulation is also expensive, and since it could fail in light of difficulties in changing the yen’s worth in the massive global forex market, it should be used with caution.

Japan will only approve a last-resort measure if the Oral involvement halts the free fall the in the local currency. When and whether the authorities decide to step in, the speed at which the local currency declines is very important, not just the level.

It has been suggested that interruption would be considered if the country trials a “triple” sell-off of yen, bonds and domestic stocks, , similar to the capital outflows in some developing markets. Let’s see how it works!

How would it work, let’s find out!

When the government intervenes to prevent the yen from rising, the Finance Ministry will issue bills for short term in order to increase the value of the yen, which they will sell on the market.

If the government steps in to prevent the yen’s decrease, they must sell foreign currency on the market in order to bring the price of the yen back up.

The minister of finance will ultimately decide whether to interfere. The central bank of the country will serve as a broker and execute the command on the market.

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The last question is: WHAT ARE THE DIFFICULTIES?

In addition, currency interference with yen purchases is more challenging than yen sales.

In order to conduct an intervention in which the country sells dollars and buys the Japanese currency, Japan must draw on its reserves of foreign currency.

Japan will have to sell bonds at some point in order to meet obligations, as opposed to buying the yen in the currency market.

On the other hand, using currency intervention would also need the informal approval of Japan’s G7 counterparts, especially the U.S., if it were opposite the yen/dollar. However, it won’t be easy to obtain Washington’s approval.

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