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Know When to Say Yen

Wells Fargo Economics Group Special Commentary

19 February 2016

Weighing Prospects for Currency intervention in Japan

  • The prospect for currency intervention at this time is rather low, but not impossible.

BoJ Policy Recap: 2013 – Present

  • The foreign exchange reaction has been more muted with each progressive change in monetary policy.

Rethinking Conventional Wisdom Regarding a Stronger Yen

  • There is often a relationship between currency valuation and inflation, but it’s not a hard and fast rule.

Assessing the Likelihood of Foreign Exchange Intervention

  • The yen typically performs best when global equity markets are at their worst.
  • Currency and capital flow fundamentals are not especially supportive of the yen at present.
  • Relative to 2011, economic conditions are less conducive to intervention.

The more than 7 percent run-up in the value of the yen in the wake of the BoJ’s move to negative rates has led to speculation that Japanese authorities might intervene to bring the value of the yen back down. In our view, prospects for currency intervention are rather low, but not impossible at this time.

Owing to its safe haven and funding currency status, the yen typically performs best when global equity markets are at their worst. So to the extent that the recent run-up in the value of the yen is attributable to risk aversion, a settling down in volatility should lead to some retracement of recent gains more effectively than foreign currency purchases by the BoJ.

While there is a case to be made for weaker currency helping to achieve higher inflation, Japan’s disinflationary pressures are less intense today than they were when the BoJ last intervened in currency markets in 2011. Additionally, Japan is less dependent on trade compared to some other economies (for example, Canada), which suggests a lower currency pass-through effect on prices.

Rather than getting involved with currency intervention, we think the next BoJ policy action, were it to occur, would be to broaden and/or deepen its negative interest rate policy, or to expand its existing QQE program.

Read the complete commentary here:  japan-fx-intervention-20160219.

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