Japan's Prime Minister Sanae Takaichi says her government's growth policies will lift market confidence in the yen, after a joint U.S.-Japan intervention and a Bank of Japan rate hike failed to deliver a lasting recovery. The yen was the G10's best performer in the third quarter but remains weak, and analysts say markets are pricing further intervention.
Takaichi says growth policy will support the yen
Takaichi told Nippon Television, in comments translated by Reuters, that she told U.S. President Donald Trump the currency's undervaluation was a problem when the two spoke last month. According to Reuters: "Our economic policy is not aimed at manipulating exchange rates," Takaichi said, adding that her administration aims to boost Japan's growth potential through investment in crisis management and growth areas.
She said such efforts would strengthen Japan's global competitiveness and help ensure market confidence in the yen.
Intervention and a rate hike lifted the yen, but not enough
A joint U.S.-Japan currency intervention, together with the Bank of Japan's 25 basis point September rate hike, helped make the yen the G10's top-performing currency in the third quarter, adding 3.3% against the dollar, according to Deutsche Bank data. Still, the dollar traded at 158.37 yen as of 5:57 a.m. ET Thursday, down from a peak above 163 in late July but up by around 7.65% over the last year.
Societe Generale's chief FX strategist, Kit Juckes, wrote in a Wednesday note that there is a strong market perception that further USD/JPY intervention is likely in the near future, with current pricing reflecting investors' reluctance to be caught out by intervention. He added that another spike in oil prices could reverse the recent improvement in risk sentiment, and caution still seems warranted.
FX strategists at OCBC Group Research, Sim Moh Siong and Christopher Wong, said in a Monday note that the yen's cheap valuation has done little to ease depreciation pressures. They added that while the threat of further intervention should limit disorderly depreciation, intervention alone is unlikely to deliver a sustained recovery without support from domestic policy changes.
Weak yen feeds inflation and Treasury concerns
The yen's weakness has pushed up Japanese import costs and broader inflation, with critics blaming Takaichi's spending plans for pressure on the currency and higher bond yields. U.S. policymakers are thought to be concerned about yen weakness because it could prompt Japan to sell down its Treasury holdings.
Japan holds the largest share of Treasurys among foreign buyers, according to the Treasury Department, with more than $1.1 trillion of U.S. debt. Takaichi said the government will set spending at levels consistent with lowering Japan's debt-to-GDP ratio and appropriately manage the size of bond issuances.
Source: US Top News and Analysis
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