What policy tools can Japan use to support the yen?

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Japan's Potential Policy Tools to Support the Yen

Japan's government may resort to currency market intervention to strengthen the yen against the US dollar. The yen has recently experienced a significant decline, reaching 40-year lows and a low of 162.67 per dollar. This depreciation has occurred despite the Bank of Japan's recent move to raise borrowing costs to a 31-year high, a measure that has so far failed to provide substantial support to the currency.
Direct Market Intervention

One of the primary tools available to the Japanese government is direct intervention in the foreign exchange markets. This typically involves the central bank selling US dollars from its reserves and simultaneously buying Japanese yen. By increasing the demand for yen and the supply of dollars, such an action aims to push the yen's value higher. The Japanese Finance Minister, Satsuki Katayama, has publicly stated that Tokyo "will take appropriate action at any time as necessary," signalling a readiness to deploy such measures if deemed required.
Monetary Policy Adjustments

The Bank of Japan has already taken steps to tighten monetary policy by increasing borrowing costs to a 31-year high in the current month. Generally, higher interest rates in a country tend to attract foreign capital seeking better returns, thereby increasing demand for the domestic currency. However, the yen's continued weakness suggests that the impact of this rate hike has been insufficient to counteract other market forces, such as expectations of further interest rate increases by the US Federal Reserve. The widening interest rate differential between Japan and the US has been a significant factor driving demand for dollar-denominated assets.
Communication and Warnings

Government officials have also employed verbal warnings to influence market sentiment regarding the yen's value. These statements, like the Finance Minister's remark, serve as a form of "jawboning," intended to deter excessive speculative selling of the yen and encourage market participants to anticipate potential government action. While these warnings have been issued, their effectiveness in isolation appears limited, as evidenced by the yen's persistent decline to multi-decade lows.

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What policy tools can Japan use to support the yen?

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