Image: Reuters Berita 24 English - The Bank of Japan checked interest rates in what seems to be preparation for a currency intervention, th...
 |
| Image: Reuters |
Japan can stop the yen from falling too much in more ways than just talking. One of them is to get involved directly in the currency market and buy up a lot of yen.
Here's how yen-buying intervention could work, how likely it is to happen, and what problems could come up:
WHEN DID JAPAN LAST CONDUCT YEN-BUYING INTERVENTION?
Because the economy depends so much on exports, Japan has always tried to stop sharp rises in the yen and done nothing when the yen fell.
Interventions to buy yen have been very rare. The last time Japan did something to help its currency was in 1998, when the Asian financial crisis caused the yen to drop in value and a lot of money to leave the area quickly. Before that, in 1991 and 1992, Tokyo tried to stop the yen from going down.
WHAT WOULD MAKE TOKYO BUY MORE YEN?
Currency intervention is expensive and might not work because it is hard to change the value of a currency on the huge global foreign exchange market.
This is a big reason why it is seen as a last-ditch effort, and Tokyo would only go ahead with it if verbal intervention failed to stop the yen from falling on its own. The rate of the yen's decline, not just its level, would be a key factor in whether and when the government would step in.
Some policymakers say that intervention would only be possible if Japan faced a "triple threat" of selling yen, domestic stocks, and bonds at the same time. This would be like the sharp capital outflows that some emerging economies have seen.
WHAT WOULD HAPPEN?
When Japan tries to stop the yen from going up, the Ministry of Finance puts out short-term bills to get more yen, which it can then sell on the market to lower the value of the yen.
If the government wanted to stop the yen from going down, it would have to use its foreign reserves to get dollars to sell on the market in exchange for yen.
In both cases, the final order to step in will come from the finance minister. The Bank of Japan will be the order's agent and carry it out in the market.
WHAT DO YOU SEE AS THE PROBLEMS?
Intervention by buying yen is harder than intervention by selling yen.
Japan's foreign reserves are worth $1.33 trillion, making them the second largest in the world after China's. They are likely mostly made up of dollars. Even though there are a lot of reserves, they could run out quickly if it takes a lot of money every time Tokyo steps in to change rates.
This means that it can only keep intervening for so long, unlike when it sells yen, when Tokyo can keep printing bills to raise yen.
If it were done against the dollar/yen, currency intervention would also need the informal approval of Japan's G7 partners, especially the United States. This is hard to do because Washington has never liked the idea of stepping in to change the currency, except in cases of extreme market volatility.
