Japan's ex-FX diplomat: No need for intervention to back yen

© Reuters. FILE PHOTO: Coins and banknotes of Japanese yen are seen in this illustration picture taken June 16, 2022. REUTERS/Florence Lo/Illustration/File Photo

By Tetsushi Kajimoto and Takaya Yamaguchi

TOKYO (Reuters) - Japan need not intervene in the exchange-rate market to stem yen falls, as such a move would be ineffective in countering broad dollar gains, former top currency diplomat Hiroshi Watanabe told Reuters on Wednesday.

The dollar reached a fresh 24-year peak against the yen and new highs versus some other currencies on Wednesday after U.S. economic data reinforced the view that the Federal Reserve would continue aggressive policy tightening.

"The dollar/yen seems to be overshooting somewhat now, and could briefly touch 145 later this month. But such a move likely won't last long," said Watanabe, who is now the president of Institute for International Monetary Affairs.

Watanabe oversaw Japan's currency policy from 2004 to 2007 and retains close contact with incumbent policymakers in and outside of Japan.

The dollar jumped to 143.57 yen early in the Asian day before extending gains to trade at 144.38. The move raised some speculation about the possibility of official market intervention to stem the yen's weakness.

However, Watanabe shrugged off the idea.

"The government doesn't need to respond, even if the dollar briefly touches 140 or 145 yen. It also doesn't need to conduct operations (to smooth market volatility), as exchange-rate moves are driven by broad dollar gains," he said, specifically ruling out the chance of Tokyo conducting solo yen-buying intervention.

The BOJ has kept interest rates near zero and has pledged to keep doing so. But some market players think it could allow the 10-year yield to rise above the target or raise short-term rates so the rate gap between the United States and Japan narrows, helping to support the yen.

However, Watanabe said there was also no need for the Bank of Japan to raise interest rates to stem the weak yen.

"I don't think the Bank of Japan would do such a foolish thing to raise interest rates to stem the yen weakness. Doing that would be like declaring that it will conduct monetary policy with no logic at all."

The yen's recent values contrast with its standing in 2011, when Japan last intervened in the market - at that time selling yen and buying dollars. In that year its trading range was approximately 85 per dollar to 75 per dollar.

"I don't think the days of a very strong yen will ever return. Much of the weakness of the yen reflects a decline in confidence of Japan's economic strength, not interest rate differentials."