Since last Friday, when the US Treasury conducted a so-called “rate check” of market participants, the yen has jumped from around ¥159 per dollar to hold levels close to ¥153. It is a sizeable move, and while it remains unclear whether any intervention actually took place, the signalling by the US and Japan was the closest thing short of it. Intervention to strengthen the yen is unlikely to do much good, but equally, it is unlikely to do much harm. The bigger question to ponder for Japanese prime minister Sanae Takaichi — and her electorate — is why the yen is so persistently weak.
Intervention is unlikely to do much good because of the basic trilemma of international economics. The trilemma states that it is not possible to have all three of a fixed exchange rate, free movement of capital and an independent monetary policy. Since there is no plan to stop Japanese citizens from moving their capital in and out of the country, or to prevent the Bank of Japan from setting interest rates as it sees fit, it follows that the authorities will be unable to fix the exchange rate. Empirical studies of currency intervention suggest there is a short-term impact on market prices that quickly dissipates.
Intervention is unlikely to do much harm because the yen is, according to most estimates, extremely cheap. Japan has large foreign currency reserves — accumulated decades ago, during interventions when it was trying to hold the yen down, rather than prop it up — and converting some of those reserves back into yen at today’s advantageous exchange rates will realise a sizeable profit. As long as Japan does not try to fight the markets with massive, open-ended intervention, purchases now will most likely work out as a good trade, and not something the country has cause to regret.