Former Japan Currency Chief Offers Insight: FX Intervention Should Be Coupled With Rate Hikes
In a recent interview with Reuters, Takehiko Nakao, a former top currency diplomat, shared his perspective on Japan's foreign exchange (FX) intervention strategy. Nakao, who served as vice finance minister for international affairs between 2011 and 2013, emphasized the potential impact of FX intervention on markets, but also highlighted the importance of a complementary approach.
According to Nakao, while FX intervention can deliver an immediate jolt to markets, its effects will be more lasting if the Bank of Japan (BOJ) demonstrates a clear commitment to steadily raising interest rates. This strategy, he believes, can help curb excessive jumps in long-term government bond yields and address the yen's weakness.
Nakao's comments come at a critical time, as Japan's election campaign enters its final stretch ahead of Sunday's vote. The BOJ has already raised its short-term policy rate to 0.75% in December and signaled its readiness to keep pushing up borrowing costs. However, real borrowing costs remain deeply negative, with inflation exceeding the BOJ's 2% target for nearly four years.
The former diplomat blamed the yen's weakness on the BOJ's still-accommodative stance, citing the slow pace of rate hikes. He suggested that by responding appropriately to inflation through rate hikes, Japan can narrow the U.S.-Japan rate differentials and strengthen the yen.
Nakao also touched on the nomination of Kevin Warsh as the next Federal Reserve chair, suggesting that Warsh is likely to adhere to the tradition of a strong, stable dollar being in the United States' interest. This, he warned, could further weaken the yen if the BOJ is slow to raise interest rates.
In summary, Nakao's insights offer a nuanced perspective on Japan's FX intervention strategy, emphasizing the need for a balanced approach that combines FX intervention with a clear commitment to raising interest rates. His comments invite further discussion on the most effective strategies for managing Japan's currency and inflation challenges.
