IMF Sees No Conditions for Japan to Intervene in Currency Market

The International Monetary Fund said that it sees no factors that would compel Japan to intervene in the foreign exchange market to support the yen.

(Bloomberg) — The International Monetary Fund said that it sees no factors that would compel Japan to intervene in the foreign exchange market to support the yen.

“We don’t see any conditions,” Sanjaya Panth, deputy director for IMF’s Asia and Pacific Department, told reporters Saturday at the annual gathering of IMF and World Bank in Marrakech, Morocco. Pantha cautioned that he wasn’t speaking on behalf of the Japanese authorities, who he said “may know things I don’t” about the situation. 

Panth said the yen’s depreciation has been mostly driven by interest rate differentials, reflecting economic fundamentals as inflation rises elsewhere while the Bank of Japan sticks with its ultra-loose policy to generate stable inflation. He said the IMF isn’t seeing key criteria that would support a need for intervention, namely dysfunction of markets, financial stability risks or de-anchoring of inflation expectations. 

Whether Japan will intervene to support the yen has been a key focus lately, with the currency staying near 150 per dollar. Panth’s remarks come a day after Japan’s top currency official sent a warning to traders, directly hinting at the possibility of intervention to Group of 20 counterparts if the yen moves excessively.

Read More: Japan Finance Chief Sends Warning After Yen’s Renewed Weakening 

The veteran IMF official refrained from forecasting the timing for the end of negative interest rate and a yield curve control. There are both upside and downside risks for Japan ranging from inflation expectations to the outlook of the global economy, Panth said. 

BOJ watchers are seeking clues on whether the bank will adjust its policy Oct. 31, with a widely expected upgrade in inflation outlook. Concerns over inflationary pressures have grown in global financial markets in the wake of a war between Israel and Hamas, which has been seen as a potential threat to oil markets if the conflict spreads through the region. 

“We’re still talking about two more weeks, three more weeks, a lot of things are happening in the world,” before the next BOJ meeting, Panth said. “I’m not going to try to predict what the Japanese authorities are going to do, except to say that I’m quite confident that they’ll look at it very carefully and make the right call.”

Some economists are now paying more attention to IMF’s view on BOJ policy. In July, IMF Chief Economist Pierre-Olivier Gourinchas said the BOJ should move away from the yield curve control a few days before the bank adjusted it in Governor Kazuo Ueda’s first surprise move. 

The IMF raised its forecasts for Japan’s price gains this week, projecting that inflation in the world’s third-largest economy will run much hotter than the BOJ’s 2% target over the next year. Japan’s key inflation measure has stayed above the price goal for a 17th month. Since the latest quarterly outlook report in July, the yen has weakened and oil prices have risen, boosting market expectations for the central bank to raise its projection again. 

“There’s much more scope now than there has been for a very, very long time in Japan that inflation is going to remain 2% or the 2% target would be achieved,” Panth said. “The probability of that happening has certainly increased much more than in the past.”

The IMF now sees Japan’s consumer prices rising 3.2% this year and 2.9% in 2024, compared with 2.7% and 2.2%, respectively, forecast in April. 

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