Yen intervention will stay in toolbox, says Masatsugu Asakawa

In most countries there are two people whose every utterance can make markets plunge or soar. First is the central bank governor, whose power over monetary policy sets interest rates across the economy. Second is the finance minister, with power of the purse and ability to raise taxes or launch a fiscal stimulus.

In Japan, however, there is a third. His name is Masatsugu Asakawa. As vice-minister of finance for international affairs, Mr Asakawa is the senior official in charge of currency policy — and since Japan thinks yen intervention is a legitimate tool of public policy, he has formidable power.

A surge in the value of the yen since the start of 2016 — up from around ¥120 against the dollar to trade as high as ¥105 — has turned all eyes to Mr Asakawa. By hurting Japan’s exports, the yen’s strength threatens to choke off the fragile economic progress made since prime minister Shinzo Abe came to power in late 2012. Recent data are more upbeat, with Japan recording annualised growth of 1.7 per cent in the first quarter of 2016. But markets are on high alert for yen intervention.

Actually stepping in to sell the yen would annoy the policymakers in US, in particular, which suffers when other countries weaken their currency against the dollar and use it as the “consumer of last resort”.

However, speaking with Nikkei and the Financial Times on May 16, Mr Asakawa defended Japan’s decision to keep currency intervention in its policy toolbox. “What we need to be conscious of is that excessive volatility and disorderly movements will have an adverse impact on economic stability,” he said.

To avert this perceived peril, Mr Asakawa and his boss, finance minister Taro Aso, have stepped up their “verbal intervention” in an effort to talk down the currency without actually taking action. As a result, many analysts believe the authorities will step in and sell if the yen rises sharply past ¥105 to the dollar.

However, Mr Asakawa also appeared keen to intimate that intervention might be used only to slow down a sharp appreciation rather than to defend a particular level.

Even in this scenario, history suggests that in a country with no capital controls and monetary policy set by an independent central bank, unilateral intervention has little long-term effect. Which raises a question: why bother?

The question is particularly acute for Japan because most measures suggest the yen is close to its long-run fair value. According to the International Monetary Fund, the yen’s purchasing power parity — a measure of how much it costs to buy the same goods in different countries — is ¥103.3 against the dollar. The OECD puts PPP at ¥106. Using a different measure called the “fundamental equilibrium exchange rate”, the Peterson Institute in Washington puts fair value at ¥108.

But Mr Asakawa played down the relevance of PPP and the notion of fair value to decisions about intervention. There are many different PPPs, he said, depending on what price index you use for comparison. “What you have to be careful of with PPP is you’re using a measure of long-term flows — PPP does not determine the short-term capital flows of a day, two days, a week or a month,” he said, adding: “PPP is an attempt to derive fair value for some fixed set of assumptions, and while it’s not that a currency’s level is irrelevant to the policy authorities, volatility is what really matters.”

Given ultra-easy monetary policy, it is quite plausible that the yen should be trading below fair value. Mr Asakawa declined a chance to argue that the yen should be lower, however, while noting that easing monetary policy should naturally lead to a weaker exchange rate. “The market decides where it should be,” he said.

Although they will not be present at the G7, the world’s most important currency policymakers sit in Beijing. Perhaps unsurprisingly, given Japan’s exports compete with those of China, Mr Asakawa is sympathetic to Beijing’s desire to avoid a rapid depreciation in the renminbi. “A collapse in the renminbi would be a big shock to the global economy, and while I think some decline is unavoidable given capital outflows, I think it’s natural that the Chinese authorities are taking steps to moderate that decline,” he said.

He noted that at the recent National People’s Congress, “Chinese authorities made clear that falls in the renminbi are not to boost export competitiveness so that gave some reassurance to the markets”. Through the G7 series of meetings, Mr Asakawa will explain Japan’s currency policy to his counterparts. His big decision, though, comes afterwards. The G7 spotlight has weighed against Japan intervening. But if the yen is still strong when the world’s leaders have gone home, the option to step in and start selling will be alluring indeed.