Forex Intervention Can't Save Yen

The persistent weakness of the Japanese yen has drawn authorities' attention to other more fundamental driving factors, prompting the Ministry of Finance in Japan to establish an expert panel to investigate the underlying causes of structural issues in Japan's current account.

Japanese policymakers are shifting their focus to more structural economic factors behind the continued decline of the yen, as they believe that foreign exchange intervention has limited effectiveness in reversing the overall downward trend of the yen.

Data released on Friday may show that Japan has spent about 9 trillion yen from late April to early May to slow down the depreciation trend of the yen, which had previously fallen to a 34-year low of 160 yen per US dollar.

Although the reason for the yen's decline is usually attributed to the huge interest rate differential between the US and Japan, the persistent weakness of the yen has made policymakers pay attention to other more fundamental driving factors, such as the decline in Japan's global competitiveness.

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Led by Japan's chief currency diplomat Masato Kanda, the Ministry of Finance in Japan established a group of 20 scholars and economists this year to delve into the underlying causes of structural issues in Japan's current account.

However, Masato Kanda stated that foreign exchange itself is not within the scope of the group's discussion.

According to presentation materials and meeting minutes released by Japan's Ministry of Economy, Trade and Industry, the group has held four meetings since March, discussing measures to enhance Japan's global competitiveness and use overseas profits to promote domestic economic growth.

A senior government official said: "The Japanese themselves no longer invest in Japan. The profits they earn overseas do not flow back to the country for reinvestment abroad, and foreign direct investment flowing into the country remains minimal."

The unnamed official said: "This issue needs to be resolved through structural reforms."

In the landmark "Abenomics" strategy launched by former Japanese Prime Minister Shinzo Abe ten years ago, structural economic reforms have always been the most elusive part, as ultra-loose monetary policy has allowed uncompetitive businesses to survive.Another government official stated: "Essentially, fundamental changes in the Japanese economy must occur for the relative value of the yen to change." The official indicated that intervening in the exchange rate can curb speculative behavior, but it cannot reverse the long-term weak trend of the yen, nor is that its purpose.

Japan's current account surplus has not helped to support the yen. Data from the Ministry of Finance shows that Japan's current account surplus was approximately 21 trillion yen ($134 billion) last year, indicating that Japan's income still exceeds its overseas expenditures. However, over the past decade, there has been a significant change in the composition of its surplus, which could put pressure on the yen.

The disappearance of Japan's trade surplus reflects the surge in energy import costs and the increase in overseas production. A survey by the Ministry of Economy, Trade and Industry shows that about 40% of the products of Japanese manufacturers with overseas operations are now produced abroad.

As more companies begin to acquire foreign firms in pursuit of overseas growth, Japan now offsets its trade deficit with an increase in primary income surplus from securities and overseas direct investments. However, analysts say that most of these overseas earnings are reinvested abroad rather than being converted into yen and repatriated, which could be the cause of the yen's continued weakness.

Mizuho Bank's Chief Market Economist, Daisuke Karakama, estimates that only about one-third of last year's 35 trillion yen primary income surplus may flow back to the domestic market.

He said that from a cash flow perspective, Japan may have had a current account deficit last year, as its primary income surplus may not have been sufficient to offset trade and service expenditures.

Karakama, a member of the Ministry of Finance's expert panel, stated, "The demand for yen may not be as strong as the 20 trillion yen current account surplus suggests."

The panel is expected to compile its proposals around June.Another group member, Chief Strategist of Fukuoka Financial Group, Tohru Sasaki, stated that Japan may face more trouble if Japanese households lose confidence in the yen and transfer their cash and deposits, valued at 1100 trillion yen, overseas.

He said, "There are already some signs of this," such as the preference for foreign stocks under Japan's tax-free stock investment plan.