The Japanese government and the Bank of Japan may have generated ¥2-¥3 trillion ($12.7-$19.1 billion) in gains from an estimated ¥10 trillion ($63.7 billion) in yen-buying, dollar-selling intervention carried out since late April, sources said on May 16.
The gains likely came from selling dollar-denominated assets, including US Treasuries purchased when the yen was much stronger, during the recent period of yen weakness.
With the dollar now worth more in yen terms, the sales would have produced a larger yen-denominated return. The development has fueled speculation that Prime Minister Sanae Takaichi could use the gains to help fund her goals of cutting the consumption tax and strengthening Japan’s defense capabilities.
Inside the Intervention Gains
The government and the BOJ are believed to have intervened on April 30 with a yen-buying operation worth around ¥5 trillion ($31.8 billion), after the currency weakened into the ¥160 range against the dollar. They are also thought to have re-entered the market in early May, with additional intervention totaling more than ¥4 trillion ($25.5 billion). Some estimates put the combined scale of the operations at around ¥10 trillion.
Currency intervention operates in two directions. When the yen is too strong, the government procures yen through short-term government securities, sells those yen in the foreign exchange market, and buys foreign currency to curb the yen’s rise.
When the yen is too weak, it does the opposite: it sells foreign-currency assets such as bonds and uses the proceeds to buy yen in the market. The funds are managed through the Foreign Exchange Fund Special Account, a dedicated account for currency operations.
This time, Japan appears to have sold US Treasuries and other assets that were acquired cheaply in yen terms during past interventions when the yen was strong. Selling them at today’s weaker yen levels meant the government received far more yen in return. Takero Doi, a professor at Keio University, estimates that the exchange-rate gains may have amounted to around ¥2-3 trillion.
Funding Tax Cuts or Defense
Speculation is now growing in financial markets that the gains could be tapped to help fund the prime minister’s plan to abolish the consumption tax on food for two years.
Scrapping the tax on food would require an estimated ¥5 trillion in annual revenue from alternative sources. The prime minister has said the measure would not be financed through deficit-covering bonds, but through a review of special tax breaks for corporations, subsidies, and other non-tax revenue. That category includes surpluses from the Foreign Exchange Fund Special Account, such as returns on foreign-currency assets.
Normally, gains from yen-buying, dollar-selling intervention are used to redeem the short-term government securities issued to raise yen in the first place. But at a time when the government is “looking for non-tax revenue,” Doi said, using the gains as a surplus to help fund a consumption tax cut is becoming a more plausible option.
A consumption tax cut, however, faces several practical obstacles, including the time required for retailers to update their cash register systems, leaving its prospects uncertain. Part of the surplus is already transferred to the general account and used for purposes such as defense funding. If the exchange-rate gains are tapped, they could also be directed toward the defense spending increases the prime minister is considering.
In January, during a Lower House campaign speech in Kawasaki, the prime minister referred to the Foreign Exchange Fund Special Account, saying the yen’s weakness had left its investments “in very healthy shape.” Attention is now turning to how she will use the account under her banner of “responsible proactive fiscal policy.”
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(Read the article in Japanese.)
Author: The Sankei Shimbun
