Japan does not need to intervene in the exchange rate market to stem the fall of the yen, as such a measure would be ineffective in countering the dollar’s strong gains, former senior diplomat Hiroshi Watanabe told Reuters on Wednesday. .
The dollar hit a fresh 24-year high against the yen and new highs against some other currencies on Wednesday after U.S. economic data bolstered the view that the Federal Reserve will continue to aggressively tighten policy.
“The dollar/yen appears to be moving higher now and could touch 145 briefly later this month. But such a move is unlikely to last long,” said Watanabe, who is now president of the Institute of International Monetary Affairs.
Watanabe oversaw Japan’s monetary policy from 2004 to 2007 and maintains close contact with senior policymakers in Japan and abroad.
The dollar jumped to 143.57 yen at the start of the Asian day before extending its gains to trade at 144.38. The move raised speculation about the possibility of official market intervention to stem the weakness of the yen.
However, Watanabe ignored the idea.
“The government doesn’t need to react, even if the dollar briefly touches 140 or 145 yen. It also doesn’t need to trade (to smooth out market volatility) because exchange rate moves are driven by large dollar gains,” he said, specifically ruling out the possibility that Tokyo conducts a solo yen buying intervention.
The BOJ kept interest rates near zero and pledged to continue to do so. But some market participants believe this could allow the 10-year yield to rise above target or push up short-term rates, so that the yield spread between the United States and Japan narrows, contributing to support the yen.
However, Watanabe said there was also no need for the Bank of Japan to raise interest rates to stem yen weakness.
“I don’t think the Bank of Japan would do such a stupid thing by raising interest rates to stem the weakness of the yen. To do so would be tantamount to declaring that he will conduct a monetary policy without any logic.
The yen’s recent values contrast with its position in 2011, when Japan last intervened in the market at the time by selling yen and buying dollars. That year, its trading range was around 85 to the dollar to 75 to the dollar.
“I don’t think the days of a very strong yen will ever return. Much of the yen’s weakness reflects declining confidence in Japan’s economic strength, not interest rate differentials.