Naoyuki Shinohara, Japan's former top currency diplomat, recently pointed out that Tokyo's latest measures to support the yen inevitably bring to mind the Asian financial crisis of the late 1990s. Although Japan's current economic scale is in a completely different league from that of crisis-stricken Thailand at the time, the market dynamics regarding the acquisition of US dollar liquidity in both countries present unsettling similarities.
Earlier this month, US Treasury Secretary Scott Bessent publicly announced that Washington would coordinate with Tokyo to curb the yen's depreciation, advising the Japanese authorities to prioritize utilizing dollar swap lines rather than selling US Treasuries to raise funds for future currency interventions. Shinohara noted that the US insistence on Japan using swap lines closely mirrors the historical precedent when the US, Japan, and the International Monetary Fund provided dollar funding to Thailand to bolster its foreign exchange reserves.
Looking back at the joint market defense operations conducted by the US and Japan on July 31, the operational model differed significantly from traditional coordinated interventions. Historically, joint interventions were typically underpinned by a consensus among major economies on exchange rate trends, accompanied by a joint G7 statement as an endorsement. However, this recent operation was not accompanied by any G7 joint statement, and the Bank of Japan was notably absent from coordinated efforts with the Ministry of Finance. In coordinated interventions, signaling is crucial, and the lack of deep central bank involvement significantly dilutes the policy message.
Market observers believe that US participation was largely a symbolic gesture, with the underlying objective being to implicitly pressure Japan to strengthen policy execution, particularly to push the Bank of Japan to accelerate interest rate hikes. With the BOJ's policy rate currently hovering around 1%, market consensus suggests it needs to raise rates to approximately 1.5% as soon as possible. Nevertheless, relying on just one or two rate hikes may still be insufficient to fundamentally reverse the yen's downward trajectory.
Beyond adjustments to domestic monetary policy, shifts in the external macroeconomic environment could also provide support for the yen. For instance, signs of an economic slowdown in the US, or easing tensions in the Middle East leading to lower oil import costs for Japan, would help alleviate depreciation pressures on the currency. For Japan, the immediate priority is to firmly prevent a rapid and uncontrolled slide in the yen, as an excessively weak domestic currency poses a far greater risk of plunging the national economy into distress than an appreciating one.
