Opinion: Japan’s central bank has intervened to prop up the yen last week for the first time since 1998, but it faces having to abandon decades of economic policies if it wants to arrest the currency’s dive
Late last week the Bank of Japan intervened in currency markets for the first time in almost a quarter of a century, hoping to arrest an alarming slide in the value of the yen. It’s an exercise almost doomed to failure.
Sustained intervention is not a permanent response to the yen’s weakness nor do the Japanese authorities appear particularly interested in trying to reverse it, which would entail turning their backs on a decades-long effort to kickstart sustained economic growth. After the financial crisis in 2008, as the major central banks have embarked on zero or even negative policy rates and the large-scale quantitative easing programs pioneered by Japan at the start of this century, the traditional “carry trade” between the yen and the dollar evaporated.
To some degree, the relationship between a weakening yen/strengthening US dollar is mirrored around the world because the Fed is now out-pacing even the more hawkish central banks in tightening its monetary policies. With the central bank and the powerful Ministry of Finance committed to maintaining the current monetary policies, that implies a widening gap between Japan’s interest rates and those of the rest of the developed world and the US in particular.
While the BoJ doesn’t appear to be overly stressed by the re-emergence of carry trades based on the yen, along with record levels of shorting of its currency, that might change if Japanese retailer traders – the generically-labelled “Mrs Watanabe” housewives who control the family savings – started to shift their vast hoards of deposits into global markets.
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