Government and Bank of Japan policy is seen as the main cause of the yen's decline. This article examines the view that restoring confidence in policy, rather than relying on market forces, is necessary, and outlines the background to the intervention, including coordinated action by the U.S., as well as the outlook.
Government and Bank of Japan foreign-exchange intervention reportedly temporarily halted the yen's decline into the ¥164 range. The U.S. Treasury also participated in the coordinated intervention, helping Japan secure dollar funding without selling U.S. Treasuries, in an unusual response.
However, many market participants do not believe the intervention will lead to a lasting shift toward a stronger yen. An argument has been advanced that the fundamental cause of the yen's decline is Japan's policies themselves, not the market. The view is that the market is merely expressing the government's policy credibility through prices.
The article identifies three structural problems facing Japan: fiscal discipline, the Bank of Japan's monetary policy and weak growth expectations. It explains that fiscal deficits and rising social-security costs, the continuation of low interest rates and government bond purchases, and population decline, low productivity and delayed reforms are weighing on growth returns.
Intervention is a policy intended to buy time. Unless Japan reviews its fiscal, monetary and growth strategies as an integrated package and restores confidence, the yen's decline could resume. The background to the intervention, including consideration of U.S. national interests, is also outlined.