IMF Sees No Cause for Japan to Intervene Now in FX

  • Japan should focus on domestic policies, says IMF's Everaert
  • Everaert says yen may be slightly weaker than fundamentals

Japan doesn’t have cause to intervene in foreign exchange markets now to halt the appreciation of the yen, said Luc Everaert, the International Monetary Fund’s mission chief for the country.

QuickTake Currency Wars

“Unless there are very disorderly movements in exchange rates, there is no good reason for Japan to intervene at this point,” he said in an interview in Washington. “What’s much more important is that Japan adopts domestic policies to strengthen growth and inflation in the economy and let the exchange rate move however it wants to.”

The yen has gained about 10 percent this year, hampering Governor Haruhiko Kuroda’s efforts to attain his 2 percent inflation target and undercutting the competitiveness of Japanese exporters. The IMF has cut its economic growth forecasts for Japan, and now sees gross domestic product expanding just 0.5 percent this year and shrinking slightly in 2017.

Everaert’s comments indicate that despite the problems faced in Tokyo, any suggestion of intervention from Japan will get a frosty reception from central bankers and finance chiefs gathering in Washington this week.

Eisuke Sakakibara, the man whose ability to move Japan’s currency in the late 1990s earned him the name ‘Mr. Yen’, this week advised against intervention.

Minister’s View

Finance Minister Taro Aso said this week that he’s watching currency markets with a sense of vigilance and that Japan will take action as needed if there are one-sided moves.

Everaert said it may be that Japan’s exchange rate is slightly weaker than its fundamentals suggest, adding that he couldn’t make a definitive judgment until the IMF does a thorough assessment by around midyear.

The yen traded at 109.35 against the dollar as of 7:54 a.m. Tokyo time on Thursday. It’s back around where it was before Kuroda expanded monetary stimulus in October 2014.

Some economists have said the BOJ governor will have to expand his program at an April 27-28 meeting and that the central bank is likely to cut its the outlook for inflation and growth.

“If it is the case that the outlook for inflation is much weaker than anticipated, the Bank of Japan has to be ready to ease policies,” Everaert said. Inflation won’t reach 2 percent under the current policies anytime in the next five years, based on the IMF’s projections, he said.

Understanding Abenomics

“We need to understand what the BOJ is trying to do. Until before Abenomics, the objective of the BOJ was to have price stability, close to around zero percent inflation,” he said. “And then with the start of Abenomics, they decided that they should achieve 2 percent inflation. That’s very difficult.”

The IMF’s forecast for the world’s third-largest economy to contract 0.1 percent in 2017 is mainly because of a planned sales-tax increase scheduled in April 2017, Everaert said.

A previous hike in the levy pushed Japan into a recession in 2014. Japan should compile an economic package of about 5 trillion yen ($46 billion) to offset the burden from the tax change, he said.

“We obviously hope that authorities are going to adopt a supplementary budget along those lines,” Everaert said.

(Corrects comment from Everaert in 7th paragraph to say yen may be slightly weaker, not stronger, than fundamentals suggest.)
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