Japan warns against volatility as yen slumps to 24-year low

© Reuters. FILE PHOTO: Japanese yen and U.S. dollar banknotes are seen in this illustration picture taken June 16, 2022. REUTERS/Florence Lo/Illustration

By Tetsushi Kajimoto and Leika Kihara

TOKYO (Reuters) - Japan is watching currency moves with a "high sense of urgency" as rapid exchange-rate moves are undesirable, a senior finance ministry official said on Thursday, in the wake of the yen's slump to a fresh 24-year low.

"Currency market volatility is heightening recently," the official told reporters. "Sudden exchange-rate fluctuations are not desirable."

The remarks came after the dollar rose to a fresh 24-year high of 139.69 yen on Thursday, as investors braced for further aggressive interest rate hikes by the U.S. Federal Reserve.

Once welcomed for the boost it gives exports, the weak yen is becoming a headache for Japanese policymakers, because it pushes up the cost of importing already expensive fuel and raw materials.

The yen's weakness is driven largely by widening interest rate differentials with the United States, as the Bank of Japan pledges to keep ultra-loose monetary policy even as the Fed embarks on big rate hikes.

"By pushing up imported goods prices, the weak yen could hurt corporate profits and consumption," said Nobuyasu Atago, chief economist at Ichiyoshi Securities.

"Further yen declines are bad for Japan's economy and could derail its recovery from the hit from the pandemic," he said.

Market positioning is not particularly stretched after a July recovery in the yen cleared out short bets, meaning there may be room for further falls if traders decide to ride the yen lower.

A dollar/yen break above the psychologically key level of 140 could heighten political pressure on Prime Minister Fumio Kishida to take additional spending measures to cushion the economic blow from rising living costs, some analysts say.

Despite the potential damage from further yen declines, Japanese policymakers have few options to moderate the currency's drop beyond trying to jawbone markets.

Tokyo would need informal consent from its G7 counterparts to step into the currency market to support the yen. That would probably be difficult, given Washington's aversion to currency intervention.

There is also little incentive for the United States to stem dollar rises, which help ease its inflationary pressures, analysts say.

Furthermore, the Bank of Japan has little incentive to raise interest rates amid subdued inflation and economic weakness.

"I don't think the yen's weakening would force the BOJ to alter monetary policy. For one, exchange-rate policy falls outside its remit," said Atsushi Takeda, chief economist at ITOCHU Research lnstitute.