Expectations that Bank of Japan is not intervening in the markets.

The depreciation of the yen to less than 150 yen against the dollar has prompted warnings from Japanese officials that the pace of the currency’s decline is “excessive” and “undesirable.” However, the likelihood of a repeat of the intervention madness in buying the yen in 2022 seems unlikely. Tokyo may not intervene at all. Tolerance for the current weaker exchange rate appears higher than before, and the decrease in the volatility of the yen suggests a comfortable foreign exchange market, with yield differentials between the United States and Japan likely to narrow rather than widen from here.

In Japan, inflation peaked and is now declining, with significant easing of pressure on pipeline prices. The economy has entered a recession, although trade conditions improved in the country from 2022 onward. Additionally, the Bank of Japan seems to be on track to end negative interest rates soon, making a “natural” shift in the yen’s value more evident.

Globally, while there is increasing uncertainty about the timing and extent of interest rate movements by the Federal Reserve, the European Central Bank, and the Bank of England, they are expected to be less drastic. None of this indicates an urgent need for Japanese policymakers to enter the market and spend billions of dollars to prevent the yen from reaching new historical levels, such as 152 yen to the dollar. They may want to prevent the yen from sliding further, as more damaging sales could threaten the performance of Japanese financial markets. The yen has already depreciated significantly by 6% against the dollar this year.

However, a repeat of what happened in September and October 2022, when Japanese authorities bought the yen in the foreign exchange market for the first time since 1998, in record quantities, is a distant possibility. At that time, the annual consumer inflation rate was above 3% and still rising, with producer price inflation at 10%. Although authorities had been trying to escape deflation for years, the exchange rate/import prices spiral was not the desired alternative.

Inflation is approaching the Bank of Japan’s 2% target and is slowing down, with producer price inflation almost disappearing. Analysts at Morgan Stanley suggest that Japanese trade conditions are no longer as bad as they were 16 months ago, and import costs are not close to rising.

This comes despite surprising news indicating that the economy has slipped into recession, meaning Japan is no longer the world’s third-largest economy. Do policymakers want to raise the exchange rate, providing a path for the export-dependent economy to exit the recession, boost corporate profits, and increase the likelihood of higher desired wage settlements?

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