The exchange rate serves as a thermometer for a country's economy. When the economy is healthy, the temperature stabilizes naturally; however, if there are fundamental issues, no amount of fever-reducing medication will keep the temperature down. This is evident in the recent fluctuations of the yen. Despite the unprecedented joint intervention by the Japanese and U.S. governments to buy yen, its value is once again approaching 160 yen per dollar.
Before the joint intervention at the end of last month, the yen was nearing 164 yen per dollar. Following the intervention, it dropped sharply to around 155 yen. However, this effect was short-lived. As of August 13, the yen has risen back to the 159 yen range, once again nearing the psychological resistance level of 160 yen. Market analysts believe that if the yen surpasses 160 yen per dollar, the Japanese authorities are likely to intervene in the market again. There is a perception that Japan has significant intervention capacity, backed by its dollar reserves of nearly $1 trillion.
The problem lies in the diminishing effectiveness of such interventions. Foreign exchange market interventions involve selling foreign currency and buying domestic currency, sending a strong signal to the market and forcing speculative positions to close. The recent U.S.-Japan joint intervention significantly unsettled investors who had bet on a weaker yen. However, once the intervention ended, market participants resumed selling yen, reversing much of the gains.
The reason is straightforward. The direction of the exchange rate is determined not by a government’s one-day transactions but by the underlying economic fundamentals. The interest rate differential between Japan and the U.S. remains substantial, and concerns about Japan's fiscal situation and its dependence on energy imports weigh heavily on the yen. If the Bank of Japan (BOJ) does not raise interest rates sufficiently, the so-called yen carry trade—borrowing yen to invest in relatively higher-yielding dollar assets—could resurface.
Thus, focusing solely on how much ammunition Japan has left for foreign exchange market interventions misses the essence of the issue. Japan still possesses considerable foreign exchange reserves, indicating sufficient capacity for further interventions. In fact, Japan is estimated to have already spent over $100 billion on two foreign exchange market interventions this year. However, the ability to spend money to defend the currency's value is entirely different from the ability to change the long-term trend of that value.
Moreover, this time, the U.S. also participated in the intervention. The joint signal from the U.S. and Japan to curb yen depreciation sent a significant shock to the market. Nevertheless, the yen's return to weakness suggests that the market prioritizes economic fundamentals over mere policy signals. Ultimately, for sustained yen strength, analysts argue that a fundamental policy shift, such as additional interest rate hikes by the BOJ or a more prolonged tightening stance, is necessary.
This situation is not just a concern for Japan. The South Korean won is also influenced by the global strength of the dollar, the interest rate differential between South Korea and the U.S., and various factors affecting domestic economic growth. While it is essential for the government to stabilize the market during periods of volatility, it should not aim to maintain a specific exchange rate level against market forces for an extended period.
The lesson from the yen's situation is clear. Foreign exchange market interventions can buy time, but they cannot change the economic direction. The fact that the government has the power to influence exchange rates is not the same as being able to keep them at a desired level indefinitely. To persuade the market, the priority must be to create economic fundamentals that the market can accept rather than opposing market forces.
* This article has been translated by AI.
Copyright ⓒ Aju Press All rights reserved.