The yen rallied sharply this week amid a widespread belief that the Japanese authorities were stepping up "covert intervention". However, the Bank of Japan is likely to maintain ultra-low interest rates at its monetary policy meeting on the 28th, which will add to the downward pressure on the yen. Analysts expect that the Japanese economy will not be able to get out of trouble for a while as the yen's decline may continue and domestic inflationary pressure is high.

The Japanese yen exchange rate fluctuated sharply again this week due to government intervention in the foreign exchange market, Kyodo News reported Tuesday.

Kyodo News quoted market participants as saying that the Japanese government and the central bank again implemented "non-public intervention" that was not officially confirmed after the 21st.

The yen exchange rate, which had been above 149.5 yen per dollar, soared by more than four yen on the day and fell below 145.5 yen. Japanese Finance Minister Shunichi Suzuki has issued a strong signal of intervention, saying that "excessive volatility caused by speculation must not be allowed."

Reports pointed out that just as the yen exchange rate approached 152 yen per dollar in New York on the 21st, the Japanese government and the central bank implemented large-scale intervention, buying an estimated more than 5 trillion yen. The yen briefly soared to near Y146 to the dollar. At that time, the Ministry of Finance did not admit to intervening in the foreign exchange market, and there was a "tactical" adjustment compared with the official intervention on September 22.

The Japanese Ministry of Finance and the Bank of Japan intervened in the foreign exchange market on September 22 to buy yen and sell dollars. Masatsu Kanda, Japan's deputy finance minister, said at the time that "excessive and disorderly movements in exchange rates cannot be tolerated". It was Japan's first foreign exchange intervention to sell dollars in 24 years and was aimed at preventing the yen from weakening too much. The last time dollar selling intervened was in June 1998, at the height of the Asian financial crisis.

For a series of operations such as non-public intervention by the government, Kumano Yingsheng, chief economist of the Japanese First Life Research Institute, believes that there are limitations in doing so, "with the accumulation of the number of interventions, the market will gradually find out the government's cards."

The Kyodo News agency article said that the implementation of the foreign exchange intervention, Kanda Shuen 24, told the media that the authorities are "365 days 24 hours in the proper response to excessive volatility." On the 26th, the yen fell back from this week's high to 148.3 yen per dollar.

The risk of policy contradictions remains

The Bank of Japan will announce its latest interest rate decision on the 28th, and the market is widely expected to keep ultra-low interest rates unchanged, which has raised concerns among analysts about the contradiction between monetary policy and the effectiveness of currency intervention.

Mr Suzuki said on the 25th that there was no policy contradiction between the finance ministry's buying of yen to support the currency and the Bank of Japan's printing of money to maintain its ultra-loose monetary policy.

Asked at a news conference on the same day whether the Bank of Japan's monetary easing policy could lead to excessive weakening of the yen, he said that monetary easing is aimed at achieving sustained and stable price and wage growth. Monetary intervention is designed to counter excessive market volatility. "They are different in their policy objectives, so they are not contradictory." Suzuki added that the BOJ's policy was aimed at achieving price stability and was not specifically aimed at monetary issues.

Japan has no good idea how to get out of its current predicament. The authorities' insistence on ultra-loose monetary policy is increasingly criticized, but higher interest rates are too much for the Japanese economy to bear.

Bank of Japan Governor Kuroda Haruhiko has repeatedly said that in the context of the strong interest rate hike of the Federal Reserve, the Bank of Japan even a small interest rate hike can not reverse the trend of the sharp decline in the yen, but may endanger Japan's economic recovery.

Regarding the speculation that the ultra-loose monetary policy will be adjusted next year, Bank of Japan member Seiji Adachi recently said that raising interest rates now has a "large negative effect", "if the negative impact continues to accumulate, the possibility of Japan falling into deflation again will increase". At present, the risks of the world economy cannot be ignored, and it is "too early" to adjust the ultra-loose monetary policy.

Although the exchange between the Ministry of Finance and the market is increasingly fierce, the market is not a minority of doubts about the sustainability of the effect, Nomura Securities chief foreign exchange strategist Yuji Goto believes that "it is difficult to reverse the depreciation trend of the yen." This is due to the difference in monetary policy between Japan and the United States caused by the spread, the basic pattern of depreciation of the yen against the dollar has not changed.

Mr. Goto said Japan's intervention was intended to buy time before expectations of a slower pace of interest rate hikes rise in the next six months as the U.S. economy shows signs of recession, but that sharp currency movements could confuse business and investment plans.

Experts generally believe that due to the recent decline in the yen is difficult to stop, the cost of social production and living is high, and the Japanese economy is temporarily difficult to get rid of the pressure and predicament of high inflation.

Japan is increasingly divided over whether to raise interest rates or keep easing. Much of the current inflation dilemma can be attributed to soaring import prices, which have been driven by the sharp weakening of the yen as a result of the Fed's aggressive interest rate hike.

Katsuya Shimizu, editorial board member of the Nikkei business daily, said Japan had been forced to intervene in the currency market recently, but the depreciation pressure on the yen would not disappear easily.

Japan's core consumer price index rose 3.0 per cent year-on-year in September, according to the latest data from the Ministry of Internal Affairs and Communications. If one does not take into account the special situation that the Abe cabinet raised the consumption tax in 2014, which led to a short-term increase in prices, inflation in September hit the highest level since August 1991, which is very uncomfortable for the Japanese people who are accustomed to deflation.

The yen has lost about 30% of its value against the dollar so far this year. According to data from the Bank of Japan, the combination of higher resource prices and a sharp depreciation of the yen has led to 19 consecutive months of year-on-year increases in corporate prices, with the corporate price index rising 9.7 per cent in September.

For most enterprises, due to the lack of the right to raise prices, they are worried that the cost of rising pressure will be transferred to the consumer side will cause customer loss, so they have to suffer silently.

On the other hand, consumers are also affected by the general price rise of commodities. According to a survey by a private organization, the price of more than 18,000 items will increase in Japan, and more than 6,000 items will increase in October alone. Japanese people said in a street interview with reporters that "there is no way", but "try to eat at home".

Source: Economic Information Daily