Politics: Fed Poised to Influence Japan’s Yen Intervention Perception in Less Than 13 Words

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Japanese authorities are concerned that new hawkish signals from U.S. central bankers at the Jackson Hole symposium could trigger another sharp yen selloff. Japan fears that Federal Reserve Chair Jerome Powell may signal further interest rate hikes, which could lead to a repeat of last year’s yen selloff against the dollar. The weakness of the yen has become politically problematic for Japan, with Prime Minister Fumio Kishida and the Bank of Japan facing criticism for inflating import costs. Authorities in Japan are not as worried about the weak yen as they were last year, but the chance of intervention will increase if a weakening economy affects the administration’s approval ratings.

The Bank of Japan Governor Kazuo Ueda is set to attend the Jackson Hole meeting, which has historically caused challenges for Japan. The concern this time centers around the weakening of the yen. Japan has not been as concerned about recent bouts of yen weakness, as the pace of declines has been moderate and the benefits of a weak currency, such as increased inbound tourism, have become more apparent. However, a more hawkish approach may be required if Powell’s comments drive up the dollar/yen exchange rate at a faster pace. The breach of the 150 yen threshold could heighten political pressure on Prime Minister Kishida to take action. The Japanese authorities do not have a specific line-in-the-sand for currency intervention, but key thresholds such as 150 yen are important for political reasons.

While Japan worries about the weakening yen, doubts remain as to whether intervention would actually achieve much. The Bank of Japan has emphasized its commitment to keeping interest rates ultra-low, despite inflation exceeding its 2% target for 16 consecutive months. However, the U.S. monetary policy and concerns about China’s economic woes may come into focus and impact the yen. Some experts argue that while authorities can smooth the pace of currency moves, they cannot affect levels or trends, which largely depend on U.S. monetary policy.

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