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U.S. “approval” holds key to Japan’s forex intervention if UK decides to bolt EU

  • June 20, 2016
  • , Yomiuri , p. 2
  • Translation

Opinion poll results showing that there are more British citizens who favor remaining in the European Union (EU) than those opting out were released on June 19. For Japan, this means that a situation of yen appreciation coupled with sagging stock prices brought about by Brexit may be avoided. However, the government and the Bank of Japan stand ready to intervene by selling yen in the market if the UK decides to bolt the EU. In which case, the Japanese government will need to put in place the conditions for the U.S. to condone such intervention.

 

Recent yen exchange rate has been strongly affected by trends in the Brexit issue.

 

A financial analyst reckons that the UK’s remaining in the EU will lead to the depreciation of the yen to the 110 yen-to-a-dollar level, while Brexit will usher in the appreciation of the yen to the 97-98 yen level, and “Japan’s intervention will become a real possibility.”

 

Whether Japan embarks on yen selling and dollar buying if the UK decides to leave the EU will also be affected by the U.S.’s position. A former vice finance minister for international affairs who used to direct exchange rate intervention at the Finance Ministry pointed out that “successful intervention will depend on coordination with the U.S.”

 

If the UK decides to leave the EU and Japan and the U.S. fail to agree on a foreign exchange policy in response, thus preventing Japan from intervening, this may result in an economic slowdown in Japan. Japan’s recession coupled with the economic slump in the newly emerging countries will seriously compromise the world economy from now on.

 

The U.S. is critical of Japan’s intervention because it believes that Japan has continued to rely on irresponsible yen depreciation to prop up its economy. Mizuho Securities’ Masafumi Yamamoto points out that for this reason, “it is possible for the Japanese government to seek the U.S.’s understanding by presenting a policy package for structural reforms and fiscal spending to persuade the U.S.” (Abridged)

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