Tokyo – In a candid interview with Reuters, former senior currency diplomat Naoyuki Shinohara said Japan’s recent effort to stabilize the yen evokes memories of the Asian financial crisis of the late 1990s. The current approach, which relies on U.S. dollar swap lines rather than the sale of U.S. Treasuries, marks a departure from the coordinated interventions that have historically involved joint statements from the G7 and close cooperation between finance ministries and central banks.
U.S. involvement and the swap‑line strategy
U.S. Treasury Secretary Scott Bessent announced this month that Washington will work with Tokyo to halt the yen’s decline by providing dollar liquidity through swap lines. Shinohara noted that the request to use swap lines – and to avoid selling Treasuries – mirrors the liquidity challenges faced by Asian economies during the 1990s crisis, when the United States, Japan and the International Monetary Fund supplied dollar funding to Thailand.
“Japan today is nowhere near Thailand’s situation, but the dynamic is uncomfortably similar,” Shinohara said. He added that the U.S. participation appears largely symbolic, sending a hidden message that Japan should accelerate its own policy actions, including faster interest‑rate hikes by the Bank of Japan.
Differences from traditional coordinated interventions
Shinohara explained that coordinated interventions have traditionally been built on a shared assessment among major economies, reinforced by public statements from the G7. “There is no sign that such a process took place this time,” he observed, noting the absence of a joint G7 statement.
He also highlighted the unusual lack of central‑bank involvement in the latest operation. Normally, central banks work hand‑in‑hand with finance ministries to deliver a powerful, unified message to the market. Without that coordination, Shinohara argued, the impact of the intervention is weakened.
Policy implications for the Bank of Japan
The former diplomat suggested that the Bank of Japan likely needs to raise its policy rate to around 1.5% from the current 1% to help stem the yen’s slide. He cautioned that one or two additional hikes may not be sufficient on their own; external factors such as a slowdown in U.S. growth or reduced oil‑price pressure from easing Middle‑East tensions could also support the currency.
“The one thing that must be avoided is a rapid depreciation of the yen,” Shinohara warned. “A country does not collapse because its currency gets stronger. It runs into trouble when its currency becomes too weak.”
Historical perspective
Shinohara, who served as Japan’s vice finance minister for international affairs from 2007 to 2010 and later as the IMF’s deputy managing director, was directly involved in policy‑making during the Asian financial crisis. His experience gives weight to his assessment that the current yen‑support effort, while different in execution, shares unsettling similarities with past regional turmoil.
As Japan continues to grapple with a weak yen and rising import costs, the debate over the most effective mix of fiscal, monetary and diplomatic tools is likely to intensify. Observers will watch closely whether the Bank of Japan follows Shinohara’s recommendation for faster rate hikes or relies on external factors to stabilize the currency.
Original reporting: Appleton, WI News Feed (HLL/CB) — read the source article.
