Intervention’s Hard Sell with Yen: ‘Red Line’ at 150 to the Dollar Remains Luring

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The yen has been weakening against the dollar, prompting concerns about the risk of intervention from Japanese authorities. However, experts believe that propping up the currency will be difficult and hard to justify. The dollar-yen pair has been influenced by the gap in long-term yields between the US and Japan, with the US having the advantage. The Bank of Japan (BOJ) has been hesitant to exit its ultra-easy monetary policy while the US Federal Reserve continues to consider tightening. Japanese authorities would need to use massive amounts of dollar reserves to make an impact in the currency market, which is both financially risky and politically charged. Tokyo may receive a grudging response from Washington when explaining the need to pour so many dollars into the market, as major democracies typically let markets determine exchange rates.

Many analysts and investors see the 150 yen per dollar level as a red line for currency intervention due to the symbolism of its connection to rising costs of living from imported goods. Public opinion is crucial at this time, especially with speculation of a potential snap election. Although Finance Minister Shunichi Suzuki has said that the ministry does not have a “defense line,” he has warned multiple times this month that Tokyo is watching the currency market with a “sense of urgency” and will not rule out any options to address excessive volatility. Experts believe that if the Ministry of Finance does not defend the yen at the 150 level, market participants will try to force it lower to 155, creating political and economic problems, as the Japanese public is already complaining about rising costs of living.

There have been few conditions that support intervention so far. Measures of expected market volatility remain subdued, and yen speculative short positions have decreased since mid-July. Some analysts argue that fundamentals suggest the yen should already be weaker than 150, and it has only been held back by the possibility of intervention and the BOJ’s potential shift away from negative interest rates. The response from the US to yen intervention will depend on the details, according to Treasury Secretary Janet Yellen. Taking action may ultimately be perceived as less costly than doing nothing, but some experts doubt that intervention will have a significant economic impact, as rate differentials still favor the dollar over the yen.

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