A former senior Japanese foreign exchange official stated that utilizing foreign reserves for market intervention can deliver an immediate impact on the exchange rate, but the effects would be more lasting if accompanied by the Bank of Japan's steady interest rate hikes. Takehiko Nakao, who previously served as Vice Minister of Finance for International Affairs (2011-2013), shared this perspective in an interview. His comments come as the yen resumes its downward trend and as Japan's elections enter the final stretch before Sunday's vote.
"Intervening in the market with real funds can exert a powerful influence, but the effects would be more enduring if the Bank of Japan simultaneously demonstrates a clear determination to raise interest rates steadily," said Nakao, who currently chairs a center for international economy and strategy. The Bank of Japan increased its short-term policy rate to 0.75% last December and has signaled its readiness to continue raising borrowing costs. However, real borrowing costs remain deeply negative, as inflation has stayed above the central bank's 2% target for nearly four years.
Nakao attributed the yen's weakness to the Bank of Japan's still-accommodative stance, noting that the slow pace of rate hikes has resulted in Japan's inflation-adjusted interest rates being significantly negative, while the interest rate differential with the United States remains wide. "Appropriately responding to inflation through rate increases might also help curb excessive surges in long-term government bond yields," he added.
The former senior official warned that if the Bank of Japan is slow to raise rates, the yen could weaken further. He specifically mentioned the nomination of Kevin Warsh as the next Chair of the Federal Reserve. "Warsh is likely to follow the tradition since former Treasury Secretary Robert Rubin, which holds that a strong and stable dollar is in the interest of the United States," he said.
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