By Makiko Yamazaki and Takaya Yamaguchi
TOKYO, March 13 (Reuters) – Japan likely has less scope to intervene in the currency market than it did in the past, even as the Middle East conflict pushes the yen back towards the key 160-per-dollar line once considered the trigger threshold for authorities to act.
The recent reluctance by officials to talk up the currency could nudge the yen as low as 165 to the dollar, some analysts say, a move that would fan import costs and broader inflation at a time the Iran war is boosting crude oil prices.
Unlike in 2022 and 2024 when Tokyo intervened to counter yen selling linked to carry trades exploiting U.S.-Japan rate gaps, the currency’s recent slide below 159 is driven more by safe-haven demand for dollars and concern that surging oil costs could hurt Japan’s economy.
Japanese policymakers privately say that intervening to prop up the yen now could prove futile, as such actions could be blunted by a flood of dollar demand that would only intensify if the war persists.
“We need to see how the war turns out and how long shipping routes through the Strait of Hormuz remains disrupted,” one official said. “This is about dollar buying, not yen selling.”
DIFFERENT THIS TIME AROUND
Currency intervention is said to be most effective when conducted to unwind huge speculative positions, such as when Tokyo stepped in to prop up the yen in 2022 and 2024.
Now, there are fewer signs of such speculative pressure building in the currency market. Net short positions in yen totalled 16,575 contracts early March, according to U.S. Commodity Futures Trading Commission data.
That is much smaller than some 180,000 contracts in July 2024, when Japan last conducted a bout of massive, yen-buying intervention.
While authorities in Tokyo have sharpened their warnings as the yen approached the psychologically important 160 level, they have avoided usual references to speculative yen selling – a textbook justification for stepping into the market.
Asked on Friday about the possibility of intervention, Finance Minister Satsuki Katayama avoided a direct answer, saying the government stands ready to act at any time, “mindful of the impact currency moves may have on people’s livelihoods.”
“If Japan were to intervene now, it wouldn’t be very effective as safe-haven dollar buying could easily continue, unless the Middle East situation settles down,” said Shota Ryu, FX strategist at Mitsubishi UFJ Morgan Stanley Securities.
“Intervention could even risk encouraging speculators to sell the yen again once it rebounds,” he added.
Japan justifies intervention based on an agreement among G7 advanced economies that authorities can step in to combat excess volatility caused by speculative action that deviates from economic fundamentals.
If recent yen falls are driven by fundamentals, Japan cannot count on G7 support for solo intervention. This has led Tokyo to focus on joining international efforts to stabilise oil prices, which is seen as the root cause of broader market volatility.
Katayama told parliament this week that Japan had “strongly urged” its G7 counterparts to convene a meeting to discuss steps to tackle surging oil prices, referring to talks that led to an agreement on potentially releasing emergency oil stockpiles.
Japan was also the first among major countries to release part of its strategic oil reserves, creating momentum for an International Energy Agency-led effort.
FOCUS SWINGS BACK TO THE BOJ
If global coordination or verbal intervention fails to arrest yen falls, however, Japan may have little choice but to raise interest rates and narrow the rate divergence with the U.S., which is seen as behind persistent yen declines, some analysts say.
“Personally, from a fundamental standpoint, a rate hike in July still looks like the most natural timing,” Akira Moroga, chief market strategist at Aozora Bank, said.
“But if downward pressure on the yen intensifies, it would not be surprising to see a move brought forward to April out of concern that yen depreciation is pushing up prices, even though the BOJ may not say so explicitly,” he said.
(Reporting by Makiko Yamazaki and Takaya Yamaguchi; Editing by Sam Holmes)
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