US-Japan-Coordinated Intervention: Structural Conversion of Weak Yen Is Essential

The U.S. and Japanese governments have coordinated with each other on a yen-buying intervention in the exchange market. Just before the move, the Japanese government had been intermittently intervening with the yen exchange rate, which had been transitioning to a range of 162 yen per U.S. dollar, and the rate temporarily dropped to 155 yen. Yet, market-selling pressure on the yen was still strong, and after the coordinated intervention, the Tokyo exchange market once again was forced back to a depreciated yen.

Satsuki Katayama, Japan's Minister of Finance, has displayed a confident posture, advocating for “even more coordinated intervention with no hesitation,” but market intervention is no more than a makeshift treatment of the symptoms.

To enact a drastic changeover from a systematically weakened yen, the Bank of Japan should proceed to gradually increase interest rates, while the government displays a consistent posture, in order to prevent the incurring of public financial instability.

It has been 28 years since the U.S. and Japan cooperated on a yen-buying intervention, which happened when the yen depreciated due to the 1997 Asian financial crisis. Until now, joint interventions only happened during situations like financial crises or major disasters, so for it to take place because of a depreciated yen is unusual.

This time, the U.S. and Japan launched the coordinated intervention, likely because the interests of Japanese Prime Minister Sanae Takaichi's administration and that of Donald Trump are in agreement: Takaichi's seeks to curb inflation due to a weak yen, and Trump's, touting a revival of the American manufacturing industry, seeks to avoid an excessively weakened yen that would handicap U.S. enterprise exports.

However, it is uncertain whether the move will alter the trend toward a depreciated yen. In April and May, the Japanese government independently carried out a nearly 12 trillion-yen buying intervention, the largest ever, but after two fruitless months, the yen was pushed back to its original weakened position.

One undeniable cause of the yen depreciation is the Takaichi administration's “responsible and proactive fiscal policy.” In addition to investments of huge sums of money for growth, the stance of pushing forward to reduce consumption tax on groceries without a clearly secured source of financial resources has magnified concerns over an expanding budget deficit, degrading trust in the yen. Carrying out policies that incur a weak yen simultaneously with yen-buying interventions meant to strengthen the yen is inconsistent policy.

The Bank of Japan's 1% policy rate, along with the U.S. rate's differential of almost 3%, also further weakens the yen.

At a meeting to determine the Bank of Japan's monetary policy at the end of July, it was pointed out that the weak yen was one factor contributing to the increased cost of living, and that forestalling increased interest rates could lead to an even further depreciated yen. The prime minister is cautious about increased interest rates that would hinder growth investment, but she should probably revise this perspective.

Actually, since the start of spring this year, a weak yen and rising interest rates have continued even further, the primary cause being the increase in crude oil prices due to U.S. attacks on Iran. The Japanese government should also doggedly work toward a quick ceasefire, cooperating with other countries to strengthen the pressure.