Yen Intervention Risk Defused for Now, Ex-Currency Boss Says

  • Currency trades in 4-yen range since reaching 15-month high
  • Yen level not `too alarming' for Japanese companies, Kato Says

The yen’s strongest gain since 2008 has petered out in time to forestall any intervention, according to Takatoshi Kato, a former top currency official at the Ministry of Finance.

“In recent days, the yen exchange rate vis-a-vis the dollar has not moved significantly, so I don’t think in the current situation Japanese authorities would be obliged to examine the possibility of intervention,” the 74-year-old Kato, who held the position of vice finance minister for international affairs from 1995 to 1997, said in a March 1 interview. “The speed of the move is more important than the level in making the decision.”

Speculation Japan would enter the market to sell its own currency heightened early last month as the yen surged to a 15-month high of 110.99 per dollar and the Topix stock index was down as much as 23 percent for the year. Since then, the exchange rate has fluctuated within a four-yen range, shares have rebounded, and the Group of 20 finance ministers agreed to “consult closely” to avoid tit-for-tat currency depreciations.

Finance Minister Taro Aso said on Feb. 12 the government would make the necessary response to market movements if needed. A stronger yen threatens both the central bank’s inflation goal as well as the corporate profits that helped lift Japanese stocks to an eight-year high last year.

Yen Bulls

Speculators have increased bullish yen bets to the most since February 2012 as a plunge in oil and a rout in global equities spurred demand for the currency as a haven, while Japan’s three megabanks all predict it will finish 2016 stronger than it started.

The yen has outperformed all its major peers this year, and had its best month since the 2008 financial crisis in February. At 113.40 per dollar on Friday in Tokyo, the currency remains well above Japan Inc.’s planning estimates for 118 for the six months to the end of March, but Kato doesn’t see that as running a significant risk to profits at the country’s exporters.

“Of course, some companies would like to see the yen in the 120s,” he said. “Overall, I don’t think the current level is too alarming for the Japanese corporate sector as a whole.”

Haven Bids

Prime Minister Shinzo Abe said Thursday in parliament that global investors buy the yen with the view that it carries the least risk, and officials need to watch market movements closely. Japan’s government didn’t intervene in the foreign-exchange market between Jan. 28 and Feb. 25, according to the Finance Ministry.

Kato proved prescient when he predicted in July that the pace of yen depreciation would moderate. By year-end, the currency only barely recorded an unprecedented fourth year of losses against the dollar.

He worked as the official responsible for intervention at the ministry immediately before Eisuke Sakakibara, who earned the moniker “Mr. Yen” for his ability to influence the exchange rate. BOJ Governor Haruhiko Kuroda followed Sakakibara in the role in 1999. Kato is currently the chairman of the Japan Center for International Finance, following six years at the International Monetary Fund.

The latest round of BOJ stimulus initially weakened the yen more than 2 percent against the dollar, before it erased all those losses as investors sought shelter from continued market turbulence. Two rounds of quantitative easing since April 2013 had helped push the currency down to a 13-year low of 125.86 in June of last year.

Fiscal Health

Kato says the risk to fiscal health is the greatest threat facing Japan, but he isn’t sure higher taxes next year are the best approach to the problem.

Prime Minister Abe acknowledged Thursday that the hit to consumption from an April 2014 sales tax hike is still being felt after sending the country into a brief recession. At the same time, he said he wouldn’t delay a second bump to the levy, set for April 2017, except in the event similar to the collapse of Lehman Brothers Holdings Inc. or a massive earthquake.

“It’s clear that a sales tax increase is necessary as a medium-to-long term prospect,” he said. “But just because it’s scheduled for April next year doesn’t mean the government is compelled to just mechanically go ahead with it. They need to carefully assess the situation first.”

The BOJ is unlikely to rush to add stimulus again, after following the European Central Bank and others on the continent in implementing negative interest rates at its last meeting in January, according to Kato, who sees the current yen exchange rate as “not significantly detached” from economic fundamentals.

“They should take time to ascertain the effects of negative rates,” he said. “If there was any additional easing that led to currency weakness, overseas authorities would try to counteract those actions.”

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