Japan's recent efforts to prop up the yen, including an estimated $59 billion intervention to counter its drop from ¥160 to ¥153 against the dollar, have yielded only fleeting effects. The yen quickly reverted to around ¥156, highlighting the challenge of unilateral currency intervention when fundamental economic disparities persist. This mirrors prior interventions in late 2022, totaling $58.7 billion, which also saw temporary gains largely attributed to external factors like declining US Treasury yields rather than the interventions themselves.
Economists and analysts hold differing views on the efficacy of these interventions. Some argue that while they may not sustainably strengthen a currency, they can establish a credible floor, signaling the government's intentions and influencing market expectations. For example, if the market anticipates intervention at ¥162, negative news for the yen might not lead to significant depreciation, while positive news could trigger appreciation. This approach focuses on setting boundaries rather than achieving sustained directional change.
However, a common view, particularly concerning large, open economies, is that unilateral interventions are largely futile in the long term, especially without coordinated support from broader monetary and fiscal policy changes. The significant interest rate differential between the US (with rates at 5.25%) and Japan (with a modest 0.1% after ending negative rates) continues to favor the dollar, making one-sided interventions expensive and likely ineffective until these fundamental economic conditions narrow. Japan's status as a major holder of foreign assets, including the Ministry of Finance's $1.2 trillion in reserves and the Government Pension Investment Fund, also plays a role in the market dynamics.
The debate extends to how intervention works. While traditional views focused on its ability to signal policy intentions or remedy coordination failures, recent evidence suggests that effectiveness can vary. Interventions seem to be more impactful when targeting short-run cyclical misalignments of the real exchange rate, when they are sustained in one direction, and when the misalignments are significant. Sales of foreign currency tend to be somewhat more effective than purchases, and intervention is less effective in highly liquid markets. Japan's ability to profit from selling dollars bought at lower yen rates when intervening to support the yen also complicates the traditional view that intervention is a "waste" of reserves.
