Japan won’t intervene to defend 145 yen line-in-the-sand, says former FX diplomat

TOKYO  – Japan likely won’t intervene in the currency market to defend a line-in-the-sand such as 145 yen versus the dollar, and instead limit any further action to smoothing operations aimed at taming volatility, former top currency diplomat Naoyuki Shinohara said.

After the dollar’s spike to near 146 yen, Japan intervened in the currency market on Thursday to buy yen for the first time since 1998. Finance minister Shunichi Suzuki signaled readiness to step in again if yen moves become too volatile.

Shinohara, who oversaw Tokyo’s currency policy during the Lehman crisis in 2008, said any further yen-buying intervention will be limited in scale given Japan‘s need to avoid drawing criticism from G7 advanced nations.

“It’s unlikely Japan will continue intervening to defend a certain line, such as 145 yen to the dollar,” said Shinohara, who retains close ties with incumbent policymakers.

“It’s impossible to reverse the market’s broad trend with intervention alone,” he told Reuters in an interview on Saturday. “The most authorities can do is to soothe markets when currency moves become very volatile.”

The dollar slid to near 140 yen shortly after Thursday’s intervention, but bounced back above 143 yen by Friday. It stood at 143.320 yen in early Asia trade on Monday.

The United States likely did not criticize Japan‘s action on Thursday since Tokyo described it as countering “excess volatility,” which the G7 agrees could hurt growth, he said.

But Washington will likely voice opposition if Tokyo repeatedly steps into the market, or gives the impression it is preventing the yen from falling below a certain level, said Shinohara, who also served as deputy managing director at the International Monetary Fund until 2015.

The yen has hovered around 24-year lows against the dollar as investors focused on the widening policy divergence between the U.S. Federal Reserve’s aggressive interest rate hikes and the Bank of Japan‘s (BOJ) pledge to maintain ultra-low rates.

Tokyo’s intervention came shortly after the yen’s dive triggered by the BOJ’s decision to keep ultra-low rates, and governor Haruhiko Kuroda’s post-meeting comments that rates likely won’t rise for several more years.

The yen’s downtrend will be hard to reverse as long as the BOJ maintains ultra-low rates, Shinohara said.

“Kuroda appeared determined more than ever before to maintain ultra-easy policy, which is tantamount to declaring the BOJ will keep pumping yen to markets,” Shinohara said.

The BOJ’s dovish stance contradicts the goal of the government’s yen-buying intervention, which seeks to prop up the currency by mopping up yen from the market, he said.

“Japan is stepping on the accelerator and the brakes at the same time. When you do that with your car, you either damage the brakes or lose control of your steering wheel,” Shinohara said.

“I don’t think Japan can keep doing this for too long.”