Japan Government's Forex Intervention in Response to Sharp Yen Fluctuations

When the yen's sharp fluctuations recently began negatively impacting the Japanese economy, the Japanese government and the Bank of Japan intervened in the foreign exchange market to stabilize the exchange rate.

In September 2022, as the US dollar strengthened and the yen's value plummeted, the government and the Bank of Japan intervened by selling dollars and buying yen, amounting to approximately 2.8 trillion yen. However, the yen's depreciation continued, and in October, the yen/dollar exchange rate soared to a historic high of over 150 yen.

In response, the government implemented additional exchange rate interventions on October 21 and 24. According to the Ministry of Finance, the scale of these interventions reached approximately 6.3 trillion yen, marking the largest foreign exchange market intervention in 24 years.

The reason for such large-scale intervention is that the rapid decline in the yen's value significantly undermines the export competitiveness of Japanese companies and leads to rising prices, placing a heavy burden on household finances. The yen's depreciation, which lasted until the end of last year, was particularly concerning because it could potentially offset the government's efforts to stabilize prices and the effects of companies' wage increases.

Exchange rate intervention is carried out by the Bank of Japan acting as a proxy, under the instructions of the Minister of Finance. The Bank of Japan sells dollars held in the Foreign Exchange Special Account to the market and purchases yen in return.

However, with the foreign exchange market returning to a yen depreciation trend after each intervention, concerns have been raised that the government's interventions may only have short-term effects. Indeed, after the intervention in October of last year, the exchange rate remained around 135 yen, but it rose again to the 140 yen level from March this year. Some argue that the fundamental cause is the difference in monetary policies between the US and Japan, and that a more fundamental approach, such as raising interest rates, is necessary.

Meanwhile, the Japanese government is sensitive to the yen/dollar exchange rate due to the large proportion of export-oriented corporations and the country's trade structure, which relies heavily on energy and raw material imports. Toyota Motor Corporation, a leading exporter, announced that it incurred approximately 1.7 trillion yen in exchange rate losses due to the weak yen last year.

The government and the Bank of Japan are likely to continue considering active interventions to prevent excessive yen fluctuations from negatively impacting the Japanese economy. However, experts advise that instead of interventions, it is crucial to address the issue with structural solutions and normalize monetary policy to narrow the gap in global currency values.