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IMF sees recent yen falls as reflecting fundamentals

MARRAKECH, Morocco :The yen’s recent declines are driven by fundamentals and do not meet any of the considerations that would call for authorities to intervene in the currency market, a senior International Monetary Fund official said on Saturday.

“On the yen, our sense is that the exchange rate is driven pretty much by fundamentals. As long as interest rate differentials remain, the yen will continue to face pressure,” Sanjaya Panth, deputy director of the IMF’s Asia and Pacific Department, told reporters.

Authorities in Japan are facing renewed pressure to combat a sustained depreciation in the yen, as investors bet on higher-for-longer U.S. interest rates while the Bank of Japan remains wedded to its super low interest rate policy.

The IMF sees foreign exchange intervention as justified only when there is a severe dysfunction in the market, a heightening of financial stability risks, or a de-anchoring of inflation expectations, Panth said.

“I don’t think any of the three considerations are existing right now,” he said, when asked whether recent yen falls call for authorities to intervene in the currency market.

Japan bought yen in September and October last year, its first foray in the market to boost the currency since 1998, to stem sharp declines that eventually pushed the yen to a 32-year low of 151.94 to the dollar.

The dollar fetched 149.57 yen on Friday.

The BOJ has been a dovish outlier among a wave of central banks raising interest rates, even as cost-driven price rises have kept inflation above its 2 per cent target for more than a year.

BOJ Governor Kazuo Ueda has stressed the need to keep rates ultra-low until inflation durably stays around 2 per cent backed by robust demand and sustained wage increases.

Panth said there were more upside than downside risks to Japan’s near-term inflation outlook as the economy was running near full capacity, and price rises were increasingly driven by solid demand.

But he said it was “not yet the time” for the BOJ to raise short-term rates due to uncertainty on how slowing global demand could affect Japan’s export-reliant economy.

In the meantime, the BOJ should continue to take steps that allow long-term interest rates to move more flexibly to lay the groundwork for an eventual monetary tightening, he said.

The BOJ guides short-term rates at -0.1 per cent. It also sets a 0 per cent target for the 10-year bond yield under its yield curve control (YCC) policy. As rising inflation put upward pressure on yields, the bank loosened its tight grip on long-term rates by raising a de-facto cap for the yield in December last year and July.

“What it did in December and July to increase flexibility on long end of the yield curve, was very much steps in the right direction,” Panth said.

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