Japan expands FX watch to include risk of yen spike as US recession fears grow

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TOKYO – Japanese policymakers worried about the yen’s decline should increasingly watch its rebound, officials told Reuters, signaling that intervention in the currency market is less likely than some investors expect.

Japan has stepped up its warnings of sharp falls in the yen, including a rare joint statement last month from the government and central bank making it clear they are ready to step in if a drop is too rapid.

While there is no change in this protective stance against excessive yen declines, authorities are also turning their attention to the risk of a sharp rise in the currency, three policymakers familiar with the matter said. .

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The change in stance reflects growing market fears that the US Federal Reserve’s aggressive monetary tightening to fight inflation could trigger a recession in the United States, forcing its central bank to slow interest rate hikes. .

That, in turn, could drive the dollar lower against the yen, they said.

“There is a chance that the US economy could slide into recession, which could trigger significant dollar selling,” said one of the decision makers, all of whom declined to be identified.

« We have to worry about both the risk of both falls and excessive rises in the dollar. »

Another of the policymakers said the main concern remained the recent sharp drop in the yen.

« But it’s also necessary to keep an eye on the risk of a strong rebound in the yen as the market’s focus shifts, » the second-tier decision maker said.

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The concern underscores how growing fears of a global recession could change the way Japanese policymakers view the outlook for the yen, shifting from a focus entirely on the risk of further declines to a more balanced stance.

The growing attention of policymakers on the risk of a reversal in the trend of a weak yen also increases the likelihood that the Bank of Japan (BOJ) will keep interest rates low.

The divergence between Japan’s low rates and the Fed’s rate hikes was a key factor in the yen’s decline.

Some market participants speculated that the BOJ may adjust its easing policy to prevent the yen from falling further. But Governor Haruhiko Kuroda dismissed that possibility, arguing that the weak economy still needed monetary support.

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RED FLAG?

Japanese policymakers have traditionally favored a weak yen over a strong yen, as yen rises have hurt exports by making Japanese goods less competitive overseas.

But the yen’s recent plunge to a 24-year low against the dollar has become cause for concern as it hurts households and retailers by inflating the already rising cost of imported fuel and raw materials.

Jawboning by Japanese officials failed to reverse the yen’s bearish trend. Despite threats of intervention, Tokyo did not step in to support him.

The emergence of a dual focus for policymakers underscores a shift in market apprehension about the global recession, from a single focus on rising prices.

The U.S. economy contracted slightly more than expected in the first quarter as a resurgence in COVID-19 infections dampened spending on services, raising a red flag for the economic outlook.

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Recession fears are also creeping into the thinking of policymakers at the European Central Bank, even as they prepare for the bank’s first interest rate hike in more than a decade to curb inflation.

« It’s hard to expect the yen to continue falling at the current rate if you know aggressive Fed rate hikes will chill the US economy, » said Yasuhide Yajima, chief economist at the NLI Research Institute. .

« If so, Japan has nothing to do to address the weak yen. »

Japan has refrained from intervening in the currency market since 2011, when it intervened to halt a sharp rise in the yen after an earthquake and tsunami hit the economy.

The last time authorities intervened to support the yen was in 1998. (Reporting by Tetsushi Kajimoto and Leika Kihara; Editing by Robert Birsel)