The recent fluctuations in the Japanese yen have caught the attention of market participants and policymakers alike. The cat-and-mouse game between speculators and Japan’s authorities has led to significant volatility in the currency markets. While the yen’s slide to near four-decade lows may have initially provided some relief, it has also raised concerns about the potential for overshooting on the strong side.
Historically, the Bank of Japan has engaged in periodic bouts of yen-buying intervention to influence the currency’s value. However, the recent decision to lift interest rates and the warning of more to come have had unintended consequences. The “carry-trade” bubble was popped, leading to a violent turn in the currency’s value and sparking stock market volatility in Tokyo and around the world.
There is a long-standing tendency for the yen to overshoot in both directions. Japan’s low interest rates since the property bust of the 1990s have contributed to the volatility and extremes in the currency’s value. The routine pendulum swing between yen weakness and exaggerated snapbacks has been a hallmark of Japan’s intervention history.
Looking ahead, there are signs that a burst of yen strength may be on the horizon. As U.S. and other G7 policy rates decline and the carry trade dissipates, Japan may seek to “normalize” its monetary policy further. The divergence in yield gaps between Japan and its G7 counterparts could lead to a significant repricing of the currency.
While yen strength could have benefits, such as lower import prices and real wage increases, there are also risks involved. A stronger yen could negatively impact exporters and the broader Japanese economy. In such a scenario, intervention by the Ministry of Finance may be necessary to stabilize the currency.
The potential for yen strength represents a double-edged sword for Japan. While it may signal confidence in the country’s economic recovery, it also poses risks to export competitiveness and economic growth. As policymakers navigate these uncertain waters, it will be crucial to strike a balance between allowing market forces to dictate the yen’s value and taking corrective action when necessary.