Economic Research View
Japan: Vice-Minister of Finance Kanda Comments on Yen Depreciation
Nomura Asset Management Co., Ltd. Published September 11, 2023

Rumi Kurumizawa, CMA
Chief Economist
On September 6th the yen weakened to the upper 147-yen range against the U.S. dollar, and Vice
Minister of Finance and International Affairs Masato Kanda made comments that he would not ruleout any options in response to the rapid move. Compared with last year's currency intervention, thebalance between the merits and demerits of a weak yen has changed significantly. Last year, the yen's
weakness blocked the benefits of expanding exports and inbound spending, but the current situation
is expected to boost inbound spending. Though the increased burden on households and companies
would be a disadvantage, import prices have decreased compared with the previous year, in contrast
with last year where they rose significantly alongside commodity prices. If households associate thedepreciation of the yen with the high prices caused by the prolonged cost push and criticism against
the government rises, the government may have no choice but to respond. There may be certain
pressure on the Bank of Japan (BOJ) to raise short-term interest rates, but this is far from consistent
with “easing household concerns”. For the time being, the most likely option would be for both theMinistry of Finance and the Bank of Japan to take a precautionary stance to prevent the yen fromdepreciating while buying time for the U.S. economic and financial market environment to change its
course.
In an interview with the Yomiuri Shimbun on September 9, BOJ Governor Kazuo Ueda revised thecourse of action on the condition of lifting negative interest rates based on remarks by Deputy
Governor Shinichi Uchida, who set a high bar. Concern over the acceleration of the yen’s depreciationis also believed to be behind the governor's remarks. Ueda also said there was a "not zero" chance ofseeing a virtuous cycle between wages and prices by the end of the year, and that policy changes
could be made as early as January 2024. However, in addition to wage and price developments,
overseas economic and political conditions will also influence actual policy decisions. I anticipate theelimination of the YCC in October 2023, but at the same time, I believe the possibility of a decision toeliminate negative interest rates (i.e., zero interest rates plus forward guidance to commit to a lowinterest rate policy for the time being) has increased slightly. The yen has appreciated by 1.2 yen to
the lower 146-yen range as of the afternoon of September 11.

Vice Minister of Finance and International Affairs Kanda comments on Yen depreciation■On September 5, against the backdrop of the widening interest rate gap between Japan and the UnitedStates, the yen depreciated against the U.S. dollar to the upper 147-yen range, reaching as high as
147.87 yen on September 7. The yen has weakened more than it did in September last year whencurrency intervention occurred. Finance Vice Minister Kanda commented on the same day that "if sucha move continues, the government will not rule out any options and respond appropriately” and that"speculative behavior or movements that cannot be explained by fundamentals are being watched witha high degree of attention." Towards the end of May, Kanda mentioned that "we are not focusing on aspecific market level per se, but focusing on the fluctuation range which we think is critical." If weexamine the fluctuation range, though the last week appears similar to conditions during last year's
currency intervention, the six-month range is not as severe as last year.

■

The purpose of intervention is not to change the trend of the exchange rate but to check speculative
movements and to adjust speed. While the short position in the Chicago IMM currency futures is ashigh as it was when intervention occurred last year, the yen's forex pain index, which Citigroupcalculates as an estimate of foreign exchange market participants' holdings, moved into positive
territory, suggesting a buy and hold position for the last few days. The IMM position is disclosed on a
weekly basis, and it might be the case that the yen is not expected to weaken further in the immediate
future.

■There is a possibility that the government will not intervene even as the rate approaches 150 yen due
to a change in the balance between the merits and demerits of the yen's depreciation compared to last
year's intervention. Last year, supply constraints and border measures made it almost impossible toenjoy the benefits of a weak yen, such as increased inbound flows and exports of goods. This time,
however, there will be positive effects from a weaker yen, especially in the inbound market. On thedownside, the yen-based import price index rose sharply last year due to a combination of risinginternational commodity prices and an acceleration in the yen's depreciation. This time, however,
although the exchange rate effect has contributed to the increase in import prices, it has been negativeon a contract currency basis. Import prices have remained high, but have not continued to rise.
Therefore, compared with last year, the advantages have increased and the disadvantages havedecreased.

■

On the other hand, the shifting of costs to consumers has been prolonged. Even if the impact of thedepreciation of the yen is small, it is difficult to deny the possibility that the government may be affectedby the combination of the recent rise in commodity prices and the depreciation of the yen. Thegovernment might decide again to intervene to avoid criticism that it has put pressure on people's lives
by neglecting the depreciation of the yen.

■If the yen weakens further, the government may expect that the Bank of Japan (BOJ) will keep the yen
in check. However, assuming that the aim is to minimize the negative impact on households, the BOJ’soptions are limited to allowing long-term interest rates to rise. If the Bank of Japan indicates thepossibility of eliminating negative interest rates and raising interest rates further, the yen is likely tostrengthen during the final phase of U.S. and European rate hikes. However, since the majority ofJapanese mortgages have floating interest rates linked to short-term interest rates, there is a risk thatan increase in short-term interest rates could lead to a worse-than-expected decline in sentiment.
Therefore, the immediate choice would be for the Ministry of Finance and the BOJ to gain time by2

keeping the yen in check and comment should there be any rapid fluctuations. Their expectation would
be for U.S. factors to halt the yen’s depreciation, i.e., for the U.S. economic data to deteriorate andraise expectations for a halt of interest rate hikes and a shift to interest rate cuts.
■

It should be noted that there are opinions that the yen deprecation is affected by structural factors. The
trade deficit is entrenched in terms of financial flows. If the trade balance deteriorates due to a rise incommodities prices, the yen will weaken against this backdrop, and the trade deficit will widen. On theother hand, a large surplus in the primary income balance has also taken hold, and the current accountbalance has returned to surplus, although it was temporarily in the red. However, much of it is notexpected to flow back into Japan or to be converted to Japanese yen, making it difficult for the current
account surplus to lead to yen appreciation from a supply and demand perspective. In fact, the yen
has become more linked to the trade balance than the current account balance in recent years. In
recent months, however, the yen has become less responsive to the reduction of the trade deficit, andthe U.S.-Japan monetary policy gap and interest rate differential appear to be taking more effect.
Therefore, even if structural factors could be influencing the yen’s weakness, in the next 1-2 years, theyen is expected to appreciate mainly due to the U.S.’s shift from a rate hike phase.

Figure 2. Correlation between the U.S.-Japan interest rate
gap and yen trends

Figure 1. U.S.-Japan interest rate gap and yen trends(JPY/USD)

(%pt)

4.5

155
U.S.-Japan 10 Yr Interest Rate Gap (LHS)

4.0

150

JPY/USD (RHS)（JPY/USD)
160

3.5

2020

150

140
3.0

135

2.51302.0125y = 18.995x + 77.224
R² = 0.8724

20191452021
Jan-Jun 2022

140Jul-Dec 2022
Jan-Mar 2023

130

Apr-23 -120

1.5

115

y = 12.481x + 92.443
R² = 0.7714

Sep 5, 2023
120

1.0
110

0.5
0.0
Jan-20

110

105
100
Jul-20Jan-21

Jul-21

Jan-22

Jul-22

Jan-23

Jul-23100
0.0

Source: Nomura Asset Management based on Bloomberg data.

0.5

1.0

1.5

2.0

2.5
3.0
3.5
4.0
4.5
(U.S.-Japan Interest Rate Gap), %pt)

Note: *Japanese Branch of foreign banks, HQ and branch account and asset data.
Source: Nomura Asset Management based on Bank of Japan data.

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Figure 5. Import price index

Figure 6. Food and energy import prices (yen based)(y-o-y, %)(y-o-y, %)

60

150

Import Price (contract currency based)

50

Oil, Coal, and Natural Gas

Currency Factor

Wheat

125

Import Price (yen based)40

Beverages and foods, Agriculture goods for foods
100

30
75

2050

1025

00-10-25-20-50-30
101214161820

1022

1214161820(Yr)Source: Nomura Asset Management based on Bank of Japan data22(Yr)Source: Nomura Asset Management based on Bloomberg data.

Figure 3. Speculator’s yen selling position(Net Position)

Figure 4. Broad yen-selling positions by overseas investors(JPY/USD)

100,000

100

50,0001100120(JPY, tn)

2520

15-50,000

130-100,000140

105-150,000
Yen Short Position-200,000
Jan-18150

Net Position (LHS)
JPY/USD (RHS)

160
Jan-19Jan-20Jan-21

Jan-22

Jan-23090 92 94 96 98 00 02 04 06 08 10 12 14 16 18 20 22(Yr)Source: Nomura Asset Management based on Bloomberg data.

Note: *Japanese Branch of foreign banks, HQ and branch account and asset data.
Source: Nomura Asset Management based on Bank of Japan data.

4Figure 8. Current account, trade balance, and currency

Figure 7. Current account(JPY, tn)
4（JPY/USD）
160

3150

y = -0.0008x + 129.84
R² = 0.134

Jun-23May-23

140

2130

1120

0110-1

100

Secondary income-2Primary income

y = -0.0012x + 109.8
R² = 0.634

90-3Current accountTrade balance (goods and services)

Services
80

Goods-4

Current account-3-2-1

01

23（Current account vs. Trade balance (goods and sevices), JPY, tn）-405 06 07 08 09 10 11 12 13 14 15 16 17 18 19 20 21 22 23(Yr)Note: Data since 2000
Source: Nomura Asset Management based on Ministry of Finance and Bloomberg data.

Source: Nomura Asset Management based on Ministry of Finance*This commentary is based on personal views of the author and does not necessarily represent Nomura AssetManagement house view.

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