Recently, the Japanese yen’s exchange rates against the U.S. dollars plunged to 147.66 JPY per $1. This latest drop in the yen comes less than one month after September’s slip. This prompted authorities to intervene in foreign exchange markets for only the first time since 1998.
According to a report, the Japanese yen dropped to 147.66 dollars per dollar, which is its lowest exchange rate against the U.S. Dollar in 32 years. After official US figures showed that prices were rising faster than expected, the latest record-breaking fall in the yen came as a result. To contain inflation, the U.S. Federal Reserve has used rate increases to stabilize it but this has led to the dollar strengthening against other currencies around the world.
In contrast to other central banks that followed the U.S. Federal Reserve’s lead and raised interest rates, the Bank of Japan (BOJ) is believed to have maintained an “ultra loose monetary policy.” Investors sold the Japanese yen as a response to the gap between U.S. Treasuries and Japanese government bonds.
Reported in September that the rise of the dollar caused the yen’s value to fall to a 24-year low against the greenback. The BOJ intervened in foreign exchange markets first time since 1998. A BBC report indicates that Japan’s authorities are likely to react to the latest plunge in the yen with another intervention.
According to the report, Shunichi Suzuki, the Japanese Finance Minister, suggests that appropriate action will be taken in order to prevent the yen’s further slide.
“We can’t tolerate excessive volatility in currency markets driven by speculative moves.” Suzuki said that he was watching currency movements with a strong sense of urgency.
The Japanese authorities spent nearly $20 billion to counter the fall of the Japanese currency against the USD in late September 2022. Although the intervention helped stabilize the yen, analysts continue to question the viability of such an intervention.
The International Monetary Fund (IMF), however, suggested in a blog that temporary foreign exchange intervention might be the most effective solution. This foreign exchange intervention, as explained in the blog, can help prevent financial amplification when a large depreciation increases financial instability risks due to mismatches.
The IMF notes that foreign exchange intervention can help to reduce the risk to financial stability and could even aid a country’s money policy.
The IMF blog stated that temporary intervention could also be used to support monetary policies in very rare situations where an exchange rate decline would de-anchor inflation expectations. Monetary policy alone cannot restore price stability.