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TOKYO, Feb 6 (Reuters) – Currency intervention using Japan’s foreign exchange reserves can deliver an immediate jolt to markets, but its \u200bimpact would be more durable if accompanied by steady rate \u200chikes, a former top currency diplomat told Reuters.<\/p>\n
Takehiko Nakao, who served as vice finance minister \u200cfor international affairs between 2011 and 2013, made the remarks as the yen resumed its decline with Japan’s election campaign entering its final stretch ahead of Sunday’s vote.<\/p>\n
“Intervention using actual funds can have a strong impact \u2060on markets, but its effects \u200cwill be more lasting if the Bank of Japan also demonstrates a clear commitment to steadily raising interest \u200drates,” said Nakao, currently chairman of the Center for International Economy and Strategy.<\/p>\n
The central bank raised its short-term policy rate to 0.75% in December and has \u200bsignalled its readiness to keep pushing up borrowing costs. But real \u200cborrowing costs remain deeply negative with inflation exceeding the BOJ’s 2% target for nearly four years.<\/p>\n
Nakao blamed the yen’s weakness on the BOJ’s still-accommodative stance, saying the slow pace of rate hikes has left Japan’s inflation-adjusted interest rates markedly negative and U.S.-Japan rate differentials wide.<\/p>\n
“By responding appropriately \u2060to inflation through rate hikes, it may \u200balso be possible to curb excessive jumps \u200bin long-term government bond yields,” he added.<\/p>\n
The former diplomat warned that the yen could weaken further if the BOJ \u200dis slow to raise \u2060interest rates, citing the nomination of Kevin Warsh as the next Federal Reserve chair.<\/p>\n
“Warsh is likely to adhere to the tradition \u2060dating back to former Treasury Secretary Robert Rubin that a strong, stable dollar is \u200cin the United States’ interest,” he said.<\/p>\n
(Reporting by Makiko Yamazaki \u200cand Yoshifumi TakemotoEditing by Shri Navaratnam)<\/p>\n<\/p><\/div>\n