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Japan Bolsters Yen Stability with G7 Support

A Report by CYS Global Remit Counterparty Sales & Alliance Unit 



The Group of Seven (G7), comprising Canada, France, Germany, Italy, Japan, the United Kingdom, and the United States, serves as a critical platform for coordinating global economic policies amongst the world’s largest advanced economies. The G7 focuses on financial stability, economic growth, trade policies and fiscal coordination. The G7 addresses significant economic challenges, including responses to financial crises, trade disputes and economic sanctions. Through its annual summits and ministerial meetings, the G7 plays a pivotal role in shaping the global economic agenda, fostering international economic cooperation, and addressing urgent financial issues such as economic recovery post-COVID-19 and the regulation of digital currencies. 


G7 Meeting and Japan’s Push for Currency Stability 

Japan renewed its push to counter excessive Yen falls during a weekend gathering of the G7 finance leaders, after a recent rise in bond yields to a 12-year high failed to slow the currency’s persistent decline. The Japanese government and central bank are grappling with the dilemma of curbing sharp Yen drops, which hurt consumption, while maintaining low borrowing costs to support a fragile economy. Following Japan’s lobbying, the G7 finance ministers reaffirmed their commitment to caution against excessive volatility in foreign exchange rates in a communique issued after their meeting on Saturday. 


Japan’s Preparedness for Market Intervention 

This agreement comes after Japan’s top currency diplomat, Masato Kanda, indicated on Friday that Tokyo was prepared to intervene “any time” to counter excessive Yen movement. 


“If there are any excessively volatile moves that have an adverse effect on the economy, we need to take action, and doing so would be justified.”  Masato Kanda 


Bank of Japan (BoJ) Governor Kazuo Ueda, who attended the G7 meeting, signalled that soft consumption or rising bond yields would not impede the normalisation of monetary policy. Despite a slump in first-quarter GDP, Ueda maintained that Japan’s economy was on track for a moderate recovery, suggesting potential interest rate hikes if the economy meets forecasts. Recent hawkish signals from the BoJ have heightened market expectations of a near-term interest rate hike or a reduction in bond purchases. Although Ueda ruled out using monetary policy to influence Yen movements, he acknowledged the impact of a weak Yen on inflation, following suspected Yen-buying intervention by the government earlier in the month. 


Finance Minister Suzuki’s Concerns 

Japanese Finance Minister Shunichi Suzuki expressed concerns on Tuesday about the negative impacts of the Yen’s current weakness, reiterating Japan’s warnings against excessive currency movements. Speaking to a parliament committee, Suzuki highlighted that while a weak Yen boosts exporter’s profits, it also burdens companies and consumers by driving up import prices.  


“As our policy goal has been to achieve wage increases that exceed the rise in prices, we are concerned more about the negative impact of the Yen’s weakness at this point.” Shunichi Suzuki 


Suzuki emphasized that Japanese authorities would continue to monitor the currency’s impact on the economy and households and would respond appropriately.  


Outlook for the Yen and BoJ Policy 

A Reuters poll indicated that many analysts expect the BoJ to raise rates later in the year. Ueda also signalled readiness to gradually raise rates if inflation consistently hits the 2% target. However, current data is less promising, with weak consumption as wage hikes lags the rising living costs. Service-sector inflation, a key indicator for the BoJ, remains flat, leading some analysts to focus on whether the BoJ will taper its bond-buying to slow the Yen’s decline.  


Market expectations of tapering have pushed the benchmark 10-year Japanese government bond yield to a 12-year high of 1.005%. Despite this, the Yen remained weak, standing at 156.98 to the United States Dollar on Friday, close to a recent low. Chief market economist of Daiwa Securities, Mari Iwashita, however downplayed the likelihood of a June taper decision. 


“While markets seem excited about the chance of a policy shift, the BoJ is probably cool-headed about all this. Besides, there is really no guarantee that such actions could stop the fall of Yen.” Mari Iwashita 

 



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