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Japanese currency jawboning efforts have gained momentum in recent weeks, with the rhetoric reaching renewed levels of intensity over the last few days. Masato Kanda – Vice Minister of Finance for International Affairs in the Ministry of Finance – warned authorities “will not rule out any options in dealing with excessive foreign exchange fluctuations,” and said “We’re in very close communication with the US monetary authorities and share the view that excessive volatility is undesirable”. Janet Yellen concurred, implicitly giving the US Treasury Department’s approval by saying “We usually communicate with them about these interventions and generally understand the need to smooth out following undue volatility”. 

There’s only one problem with this narrative: volatility hasn’t been rising, it has been falling. 

Although the absolute exchange rate has been dropping – and is nearing the 150 threshold as we go to print – measures of realized and implied movement in the dollar-yen exchange rate pair are down dramatically from the levels that preceded intervention last year. Daily trading ranges are well within normal historical bounds. 

This suggests officials probably aren’t really targeting “volatility” – at least not as markets understand the term. Instead, they want to stop or reverse a long-standing trend that has seen the yen lose purchasing power against the dollar – one that has raised inflation by inflicting higher import bills on businesses and households. 

This is understandable, but most foreign exchange veterans would agree that direct currency intervention – even on the scale Japan is capable of – is rarely effective in offsetting the sort of fundamentals-driven move that has unfolded over the last few years. A more decisive policy shift – like the Bank of Japan moving rates off the zero bound – might prove necessary in achieving the currency stability policymakers desire. 

Alternatively, if global markets were hit with a serious bout of the very same “excessive volatility” authorities are complaining about, domestic investors might rush to bring their money home as carry traders unwind their positions, and the safe-haven yen could stage a spectacular rally.

All of which is to say: be careful what you wish for, Mr. Kanda. You just might get it.

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