Japan intervenes to shore up yen as ‘reverse currency wars’ deepen
Japan intervened to strengthen the yen for the first time in 24 years when a trio of European central banks raised interest rates, highlighting the disruptive impact of inflation on currencies and monetary policy.
Inflation, which rose decades ago in much of the world, has led to sharp increases in borrowing costs, with currency markets raging. This, in turn, has led to what economists call a ‘reverse currency war’, in which central banks try to strengthen their exchange rates against the dollar, through intervention or rate hikes.
The latest moves, including rate hikes in the UK, Switzerland and Norway, came a day after the US Federal Reserve boosted the dollar by announcing its third consecutive 0.75 percentage point rate hike on Wednesday.
However, Turkey’s central bank moved in the opposite direction and continued its unorthodox policy by cutting the one-week repo rate from 13 percent to 12 percent, despite inflation rising above 80 percent last month. The lira fell to an all-time low against the dollar.
As investors bet that the Fed and other leading central banks will raise interest rates higher than previously expected to contain inflation, US bond yields have risen, pushing the dollar higher and putting downward pressure on other major currencies. including the yen, the pound and the euro.
“The Fed really sets the pace of interest rate hikes and puts pressure on other central banks through the currency markets,” said Krishna Guha, chief of policy and central bank strategy at US investment bank Evercore.
The yen has lost about a fifth of its value against the dollar this year, pushing the price of imports up and contributing to the eight-year high of Japan’s core consumer price growth, excluding volatile food prices, to 2.8 percent in recent years. year to August.
Masato Kanda, Japan’s chief foreign exchange official, said on Thursday that Tokyo has taken “decisive action” to address what it warned as a “quick and one-sided” move in the foreign exchange market. According to official records, it was the first time Japan sold dollars since 1998.
The move caused the yen to rise to ¥142.39 to the dollar in a matter of minutes. On the currency’s most volatile day since 2016, it had previously hit a low of ¥145.89 after the Bank of Japan indicated it would not change its forward guidance on interest rates and stuck to its ultra-accommodative policy.
Citigroup economist Kiichi Murashima said that even if the BoJ refined its policies, it would not fundamentally change the broader picture of a widening gap in financial conditions between Japan and the rest of the world. “It is highly questionable to what extent the government can avert the fall of the yen against the dollar,” he said.
In South Korea, there were similar concerns about the 15 percent drop in the value of the minions against the dollar this year, sparking speculation about a possible currency swap deal with the Fed, which Seoul denied on Wednesday.
Japan is now the only country in the world to maintain negative interest rates after the Swiss National Bank raised its own policy rate by 0.75 percentage point on Thursday, turning positive and ending Europe’s decade-long experiment with sub-zero rates.
The Bank of England on Thursday resisted pressure to match the pace of other major central banks, raising its benchmark interest rate by 0.5 percentage points to 2.25 percent and continuing to sell assets accumulated in under previous quantitative easing programmes.
But it also left the way open for more aggressive action in November, when it will update its economic forecasts and assess the impact of tax cuts unveiled Friday by the new government of British Prime Minister Liz Truss.
The Bank of Norway also raised interest rates by 0.5 percentage point, indicating that smaller hikes would follow until early next year. Pictet Wealth Management estimated that central banks around the world had raised key interest rates by a total of 6 percentage points this week.
Emerging and developing economies are particularly vulnerable in what the World Bank’s chief economist has described as the most significant tightening of global monetary and fiscal policy in five decades.
In an interview with the Financial Times, Indermit Gill warned that many low-income countries could go into debt.
“If you look at the situation of these countries before the global financial crisis and now, they are much weaker,” he said. “If you go in weak, you usually come out weaker.”
The interest rate hikes caused strong sales in the government bond markets. Ten-year US Treasury yields, a key measure of global borrowing costs, rose 0.18 percentage point to 3.69 percent, their highest level since 2011. UK 10-year yields rose by a similar margin to 3.5 percent .
Bond market volatility also spilled over into equities, with the European Stoxx 600 falling 1.8 percent. Wall Street’s S&P 500 fell 0.8 percent by lunchtime, keeping it on track for its third consecutive decline as traders bet on further large Fed rate hikes.