By Leika Kihara
TOKYO, Aug 27 (Reuters) – Japan’s latest effort to prop up the yen revives memories of the Asian financial crisis, with the operation bearing little resemblance to traditional coordinated interventions, former top currency diplomat Naoyuki Shinohara said on Thursday.
In announcing this month that Washington had joined Tokyo’s efforts to arrest yen declines, U.S. Treasury Secretary Scott Bessent encouraged Japan to use dollar swap lines rather than sell U.S. Treasuries to finance future intervention.
The situation brought back memories of the Asian financial crisis in the late 1990s, when access to dollar liquidity became a critical issue across the region, Shinohara said.
Back then, the United States, Japan and the International Monetary Fund (IMF) provided Thailand with dollar funding to bolster its foreign reserves.
“Japan today is nowhere near Thailand’s situation. But the dynamic is uncomfortably similar,” said Shinohara, who served as the IMF’s deputy managing director after a stint as Japan’s vice finance minister for international affairs.
“Being asked by Washington to use swap lines and avoid selling Treasuries evokes memories of that period,” he told Reuters in an interview.
Shinohara also said the joint Japan-U.S. action on July 31 to prop up the yen differed significantly from traditional forms of coordinated intervention.
Coordinated interventions have historically been built on a shared assessment among major economies over currency moves, and backed by statements by G7 advanced nations, Shinohara said.
“There is no sign that such a process took place this time,” he said. “Normally, there would be a joint statement from the G7 at some stage, but we haven’t seen one yet.”
The latest action was also unusual due to the near absence of central banks, which typically work in tandem with the finance ministries, he said.
“Messaging is the most important element of coordinated intervention. Without central banks, the message is not very powerful,” Shinohara said.
“The U.S. participation was a symbolic gesture with a hidden message urging Japan to get its act together on policy,” including speedier rate hikes by the Bank of Japan, he said.
The BOJ likely sees the need to raise interest rates at least to around 1.5% from the current 1% as soon as possible, though one or two additional rate increases would probably not be enough to reverse the yen’s downtrend, he said.
Instead, external factors could help prop up the yen such as a slowdown in U.S. growth or easing tensions in the Middle East that reduce the cost of importing oil, Shinohara said.
“The one thing that must be avoided is a rapid depreciation of the yen,” he said. “A country does not collapse because its currency gets stronger. It runs into trouble when its currency becomes too weak.”
Shinohara was involved in global economic policymaking at Japan’s Ministry of Finance during the Asian financial crisis, and served as top currency diplomat from 2007 to 2010.
(Reporting by Leika Kihara; Editing by Sam Holmes)
