The Japanese Yen exchange rate dilemma remains unresolved, with the Bank of Japan now in a dilemma.
On Friday, May 31st, the Japanese Ministry of Finance released data showing that in order to support the persistently weak yen, the Japanese government conducted two significant currency interventions between April 26th and May 29th, investing a record 9.8 trillion yen (approximately $62 billion), with most of the funds spent over four days starting from April 29th.
However, the substantial investment by Japan had a fleeting impact on the exchange rate. At the end of April, the US dollar to yen exchange rate once rose from 160 to 151.85, but just a few days later, the exchange rate had fallen back to 157.31 as of last Friday.
Despite market expectations for the Bank of Japan to raise interest rates heating up, such expectations have hardly been effective in reversing the yen's weak trend. The yen exchange rate continues to decline, approaching its lowest level in 34 years, and the issue of the yen exchange rate has not been fundamentally resolved.
Analysts point out that the Bank of Japan is now in a dilemma. On one hand, it needs to raise interest rates to stabilize the exchange rate, while on the other hand, the Japanese economy, due to weak domestic consumption, cannot support rapid interest rate hikes.
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Moreover, the United States is expected to maintain higher interest rates for a longer period, while Japanese interest rates are close to zero, making the yen continue to be the world's most popular carry trade currency.
Investors use the low-interest yen to invest in high-yield assets in other countries, further exacerbating the depreciation pressure on the yen.
UBS economist Masamichi Adachi said: "The Bank of Japan may have underestimated domestic economic issues. Even if the Bank of Japan raises interest rates significantly in 2024 (for example, by more than one percentage point), this pace is difficult to sustain due to weak domestic demand and insufficient purchasing power of the people. Investors may not believe that the Bank of Japan will really raise interest rates significantly. Unless investors see interest rates truly beginning to rise, Japan's actions will find it difficult to boost the yen exchange rate."
In addition, some analysts believe that the Japanese government's intervention this time was not entirely ineffective. Because Japanese currency officials know that their efforts are just to buy time, not to reverse the situation.
From this perspective, intervention measures are relatively successful. Although the yen has given up most of its gains from a month ago, the US dollar to yen exchange rate has not returned to the level of 160.Former central bank official and current Executive Economist at Dai-ichi Life Research Institute, Hideo Kumano, stated: "You cannot precisely say how much impact a certain amount of money will have, because the market is like a living organism.
However, without intervention, the yen might have become even weaker, so I believe this operation of about 10 trillion yen is effective."
Looking back at history, the scale of this currency intervention is unprecedented, surpassing the 9.2 trillion yen in September and October 2022, when the Ministry of Finance of Japan injected funds three times during that period to stabilize the exchange rate, with specific dates and amounts being 2.8 trillion yen on September 22, 5.6 trillion yen on October 21, and 73 billion yen on October 24.
Recall 2011, after the Fukushima nuclear accident, the Japanese government conducted a total of 9.1 trillion yen in currency intervention within a month to combat the sharp appreciation of the yen caused by a massive repatriation of funds.
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