Explainer-What would Japans currency intervention to combat a weak yen look like？

div classBodysc17zpet90 cdBBJodivpBy Leika Kihara and Tetsushi Kajimotop

pTOKYO Reuters – Japanese policymakers escalated their warnings against sharp yen falls with the finance minister saying the currencys slump to twodecade lows versus the dollar would damage the economy by pushing up living costs at a time wage growth remains slow.pdivdivdiv classBodysc17zpet90 cdBBJodiv

pBank of Japan Governor Haruhiko Kuroda, considered a firm advocate of a weaker currency, has also acknowledged that sharp yen declines could hurt the economy by making it difficult for firms to make business plans.p

pFinance Minister Shunichi Suzuki vowed to “communicate closely” with the United States on currencies as he embarks on a trip to Washington this week, where he is scheduled to meet with U.S. Treasury Secretary Janet Yellen on the sidelines of a meeting of financial leaders from the Group of 20 economic powerhouses.p

pAside from verbal intervention, Japan has several options to stem excessive yen falls. Among them is to directly intervene in the currency market and buy up large amounts of yen.p

pBelow are details on how yenbuying intervention could work, the likelihood of this happening as well as challenges:p

pWHEN DID JAPAN LAST CONDUCT YENBUYING INTERVENTION？p

pGiven the economys heavy reliance on exports, Japan has historically focused on arresting sharp yen rises and taken a handsoff approach on yen falls.p

pYenbuying intervention has been very rare. The last time Japan intervened to support its currency was in 1998, when the Asian financial crisis triggered a yen selloff and a rapid capital outflow from the region. Before that, Tokyo intervened to counter yen falls in 19911992.p

pWHAT WOULD PROMPT TOKYO TO BUY YEN AGAIN？p

pCurrency intervention is costly and could easily fail given the difficulty of influencing its value in the huge global foreign exchange market.p

pThat is one key reason it is considered a lastresort move, which Tokyo would greenlight only when verbal intervention fails to prevent a free fall in the yen. The speed of yen declines, not just levels, would be crucial in authorities decision on whether and when to step in.p

pFormer top currency diplomat Eisuke Sakakibara told Reuters a yen fall below 130 to the dollar could be the trigger for intervention.p

pSome policymakers say intervention would only become an option if Japan faces a “triple” selling of yen, domestic stocks and bonds, in what would be similar to sharp capital outflows experienced in some emerging economies.p

pHOW WOULD IT WORK？p

pWhen Japan intervenes to stem yen rises, the Ministry of Finance issues shortterm bills to raise yen which it can then sell in the market to weaken the Japanese currencys value.p

pIf it were to conduct intervention to stop yen falls, authorities must tap Japans foreign reserves for dollars to sell in the market in exchange for yen.p

pIn both cases, the finance minister will issue the final order to intervene. The Bank of Japan will act as an agent and execute the order in the market.p

pWHAT ARE THE CHALLENGES？p

pYenbuying intervention is more difficult than yenselling.p

pTo conduct dollarselling, yenbuying intervention, Japan must tap its foreign reserves for dollars it can sell to markets in exchange for yen.p

pThat means there are limits to how long it can keep intervening, unlike for yenselling intervention – where Tokyo can continue issuing bills to raise yen.p

pJapan‘s foreign reserves stood at 1.356 trillion, which is the second largest after China’s and likely consisted mostly of dollars. While abundant, the size could quickly dwindle if huge sums are required to influence rates each time Tokyo steps in.p

pCurrency intervention would also require informal consent by Japans G7 counterparts, notably the United States if it were to be conducted against the dollaryen. That is not easy with Washington traditionally opposed to the idea of currency intervention, except in cases of extreme market volatility.p

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pp Reporting by Leika Kihara and Tetsushi Kajimoto Editing by Shri Navaratnamp

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