US May Step Up Verbal Intervention on Yen Rout, Jim O’Neill Says

Tania Chen, Bloomberg News

, Bloomberg

(Bloomberg) -- US officials already have a watchful eye on the yen and may resort to more “specific” and “public” rhetoric to help Japan stabilize its currency rout, according to Jim O’Neill.

The speed and scale of yen declines suggest the weakness is becoming more like a currency crisis and the market is possibly closer to the “end game,” the prominent economist said in an interview. O’Neill was the former chief economist at Goldman Sachs Group Inc. who coined the BRIC acronym to describe emerging-market powerhouses Brazil, Russia, India and China two decades ago.

Market moves suggest Japanese officials may have intervened for a second time this week to bolster the beleaguered yen, which has slumped to a more than three-decade low against the dollar. While Japan is trying to support households under pressure from elevated inflation, the US has an interest in avoiding turbocharging an already strong greenback for reasons including competitive advantage.

“At some point, it will come to a head as it is also reasonably clear that the Bank of Japan and Japanese officials won’t want a continuous decline in the yen,” said O’Neill. “Nor will the rest of Asia, Beijing included, which also probably means the US Treasury won’t be too pleased either.”

Last month, US Treasury Secretary Janet Yellen acknowledged the concerns of Japan and South Korea over sharp declines in their currencies during a trilateral meeting of finance chiefs, which yen watchers took as a green light of sorts for direct action. But she followed up by saying intervention in foreign-exchange markets should be rare and come with advance consultation.

It’s not clear when Washington may get more involved, O’Neill said, but a direct response could “unsettle or surprise markets and make markets more nervous about taking on the BOJ.”

The question for yen bears is whether Japan’s unilateral action will work, as intervention alone cannot alter the wide gulf in interest rates that’s driving the currency’s decline. While the BOJ has brought local rates out of negative territory, they are still far from levels that would tempt investors from the higher yields on offer in the US and other countries.

While the US intervened directly to bolster the yen in 1998, that was against a very different background, O’Neill said. That suggests any American response this time would likely be measured.

“It is very difficult for them to do much about it if it is primarily because of US interest rates and the ongoing US inflation evidence,” O’Neill said. “A big drop in the dollar might add to that challenge so they wouldn’t want to precipitate the complete opposite.”

Bloomberg’s gauge of the dollar has jumped almost 4% this year as the US economy shows surprising resilience in the face of sticky inflation and the highest interest rates in years. This has reduced prospects for Federal Reserve rate cuts, sending the greenback higher against most global peers and the yen down some 10%.

“Some argue it is straightforward, the yen keeps weakening until US interest rate expectations change back to anticipating cuts again,” O’Neill added. “But somehow especially from these kind of levels, I don’t think it will play out that way.”