Former senior Japanese foreign exchange official Toshiro Muto stated that while using foreign exchange reserves for market intervention can have an immediate impact, its effectiveness would be more lasting if backed by consistent interest rate increases.
Muto, who served as Vice Minister of Finance for International Affairs from 2011 to 2013, made these comments as Japan's election campaign entered its final stage before Sunday's vote, with the yen showing renewed weakness.
"Intervening with actual funds can strongly influence the market," said Muto, currently Chairman of the Japan Center for International Economic and Strategic Studies. "But the effect would be more sustained if the Bank of Japan simultaneously demonstrates a clear commitment to continuing rate hikes."
The Bank of Japan raised its short-term policy rate to 0.75% in December and indicated readiness to keep pushing borrowing costs higher. However, real borrowing costs remain deep in negative territory, while inflation has exceeded the central bank's 2% target for nearly four consecutive years.
Muto attributed the yen's weakness to the Bank of Japan's persistently accommodative stance, noting that slow rate hikes have resulted in significantly negative inflation-adjusted interest rates in Japan and widened the interest rate differential with the United States.
He added, "Appropriately responding to inflation through rate increases might also help prevent excessive surges in long-term government bond yields."
Muto warned that further delay in raising rates could lead to additional yen depreciation, mentioning Kevin Warsh's nomination as the next Federal Reserve Chair.
"Warsh would likely follow the tradition dating back to former Treasury Secretary Robert Rubin's era, believing that a strong and stable dollar serves U.S. interests," he stated.
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