Japan could intervene again to support the yen if it declines further, former top currency diplomat Takehiko Nakao told Reuters on Wednesday, and said the time is right for the Bank of Japan to ditch or modify its ultra-easy policy settings.
The former vice minister of finance for international affairs said prolonged monetary easing risks depreciating the yen further.
“There may be views that the intervention is not imminent as the depreciation has not been so rapid compared to the last time when authorities intervened in September/October," he said.
"But it’s fully possible the authorities will conduct intervention in case the yen weakens further.”
Japan spent more than 9 trillion yen ($60.88 billion)intervening in currency markets last year to arrest the yen's decline, buying yen in September and October - first at levels around 145 and again at a 32-year low just short of 152.
The yen is currently trading around 147.77 against the dollar.
Nakao, who served as top currency diplomat from August 2011 to March 2013, oversaw a heavy intervention in 2011 by buying the dollar to stem yen strength in the wake of the U.S. Federal Reserve's quantitative easing, which made Japanese exports less competitive.
While the situation is reversed now with the yen sharply weaker, the benefits accruing to Japanese exports have been offset to some extent by the dramatic surge in prices of imports and the cost of living. The prolonged monetary easing has also been criticised by investors as distorting markets and hurting bank profits.
A weak yen is seen as a byproduct of Japan being the outlier of the global trend of monetary tightening. While the BOJ has continued powerful monetary stimulus, the Fed and other major central banks have raised interest rates to fight inflation.
At the two-day meeting ending on Friday, the BOJ is expected to maintain its yield curve control (YCC) targets at -0.1% for short-term interest rates and 0% for the 10-year bond yield.
Nakao, now chairman of the institute at Mizuho Research & Technologies and maintains close contact with incumbent policymakers, argued that the central bank should tweak its ultra-easy policy sooner rather than later.
“In the face of the ongoing headline inflation and excessively weak yen, the BOJ may have no choice but proceed with monetary policy normalization, including exit from negative rate policy and yield curve control, so as not to fall behind the curve,” he said.
“Given that JGB yields remain stable and the inflation is on the rise, now is the chance to tweak yield curve control.”
($1 = 147.7700 yen)
