Japanese efforts to stem sharp increases in the yen could face increasing opposition from other major economies, making it even more difficult for premier Shinzo Abe's administration to reflate the world's third largest economy out of stagflation. Senior government officials, including the country's top spokesman, on Thursday escalated warnings to speculators against pushing up the yen too much, stressing their readiness to take "appropriate action" in the market against what they see as one-sided moves.
But the jawboning has failed to stop market participants from testing policymakers' resolve with many betting Tokyo will not intervene unless the dollar falls below 105 yen or even 100 yen. The dollar hit a fresh 17-month low of 109.10 yen on Thursday on market expectations the US Federal Reserve will exercise caution in proceeding with its interest rate hike cycle. But a Group of 20 agreement in Shanghai in February warning countries to refrain from competitive devalulation has also emboldened yen bulls.
"The G20 meeting in February touched on competitive currency devaluation, which makes it difficult for Japan to intervene. Japan is also hosting the Group of Seven this year, which makes it difficult for Japan to move," said Kentaro Arita, senior economist at Mizuho Research Institute. Japanese financial bureaucrats dismiss such a view, pointing to other parts of the G20 communique that reserve Tokyo's right to intervene if the yen rises too sharply, namely a part that warns against "excessive volatility".
Still, former top Japanese currency diplomats with experience in currency policy negotiations with G7 economies say policymakers' hands are tied as it would be extremely difficult for Tokyo to convince other nations of the need to intervene. Japan is also unlikely to get the informal consent from its G7 peers needed to intervene without giving the impression it was engaging in "beggar-thy-neighbor" policy, said Naoyuki Shinohara, a former top Japanese currency diplomat. "I don't think solo (yen-selling) intervention by Japanese authorities will be effective I would be very surprised if they act," said Shinohara, who also served as the International Monetary Fund's deputy head.
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