AFP

Japan’s finance ministry said Thursday it intervened in the currency market to bolster the yen, which has plummeted against the dollar in recent months on the widening policy gap between the US and Japanese central banks.

It was the first government intervention to prop up the currency since 1998 and came after the dollar surged to nearly 146 yen earlier in the day.

The yen has been weakening against the dollar for months, but sank further on Thursday after the US Federal Reserve again hiked rates to tame inflation, while the Bank of Japan left its ultra-loose monetary policy in place.

“There have been some rapid, one-sided developments on the back of speculative movement in the foreign exchange market,” Japan’s vice finance minister for international affairs Masato Kanda told reporters on Thursday evening.

“The government is worried about these excessive fluctuations and has just taken resolute action,” he added, confirming this referred to intervention.

His remarks saw the yen pare most of its losses, with the dollar retreating as low as 140.70 yen.

Inflation in Japan is rising, with the consumer price index in August at 2.8 percent, its highest level since 2014, but the central bank views the increases as temporary.

In its policy statement earlier Thursday, it said it would leave its current policy in place, “aiming to achieve the price stability target of two percent, as long as it is necessary”.

“It will continue expanding the monetary base until the year-on-year rate of increase in the observed CPI exceeds two percent and stays above the target in a stable manner.”

The bank said it sees Japan’s economy as on a recovery path, “with the impact of Covid-19 and supply-side constraints waning”, though it warned of uncertainty from commodity price increases linked to the war in Ukraine.

The yen’s rapid depreciation has caused concern in Japan, pushing up the cost of imported goods for consumers and businesses.

– ‘BoJ has no choice’ –

Earlier this month, the central bank reportedly conducted a “rate check”, an operation often seen as a precursor to a currency intervention.

The move came shortly after the yen came close to breaching the psychologically significant 145 barrier, and reports of the operation temporarily bolstered the Japanese unit.

It has plunged from around 115 in March, and the BoJ on Thursday repeated that “it is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan’s economic activity and prices”.

Governor Haruhiko Kuroda, whose term expires next year, told reporters before the intervention announcement that the bank would stick with its long-standing programme.

“We haven’t been and will not be targeting certain levels of foreign exchange,” he said.

“It is desirable that forex rates reflect economic and financial fundamentals, however the recent rapid depreciation of the yen is not that and is negative for the economy,” he added.

He noted though that the dollar has gained against most major currencies.

There is little expectation the BoJ will shift course, wrote Shigeto Nagai, head of Japan Economics at Oxford Economics, in a note.

“Although foreign investors might continue challenging the yen and (Japanese government bond) yields until the Fed’s rate tightening cycle peaks, we believe that the BoJ has no choice but to stick to the current… policy.”

Asian and European markets sank Thursday and the dollar rallied after the Federal Reserve unveiled a third straight jumbo interest rate hike, said more were in the pipeline and warned the battle against inflation was straining the US economy.

While the three-quarter-point rise was widely expected, there was some surprise at the central bank’s forecast that borrowing costs would likely be held above four percent throughout next year.

Fed boss Jerome Powell reiterated his determination to focus on bringing down inflation — which is at a four-decade high — and accepted that the campaign would hit Americans hard.

“We have got to get inflation behind us,” Powell said after a two-day meeting of the Fed policy committee. “I wish there were a painless way to do that. There isn’t.”

He added that “the historical record cautions strongly against prematurely loosening policy” and the Fed would “keep at it until the job is done”.

All three main indexes on Wall Street tumbled Wednesday as traders contemplated an era of higher-for-longer rates, which could hit companies’ bottom lines.

Asia followed suit, with Hong Kong down at an 11-year low — while Tokyo, Shanghai, Seoul, Singapore, Mumbai, Taipei and Manila also down.

London, Paris and Frankfurt extended the losses in early trade.

However, the dollar continued its strong march higher, striking a fresh 24-year high of 145.90 yen, which prompted the government to embark on a rare intervention to protect its currency.

The US Fed has for months tried to walk a fine line between fighting soaring prices and trying to keep the economy from contracting, but officials accept the chances of success are narrow.

“With the new rate projections, the Fed is engineering a hard landing — a soft landing is almost out of the question,” said Seema Shah, of Principal Global Investors.

“Jerome Powell almost channelled his inner Paul Volcker… talking about the forceful and rapid steps the Fed has taken, and is likely to continue taking, as it attempts to stamp out painful inflation pressures and ward off an even worse scenario later down the line.”

Volcker used aggressive measures to quell runaway prices in the 1980s, when inflation was last as high as it is now.

Commentators are now betting on a fourth straight 75-basis-point rate hike at the next Fed meeting in November.

All three main indexes on Wall Street tumbled Wednesday as traders contemplated an era of higher-for-longer rates, which could hit companies’ bottom lines.

– ‘Bitter medicine’ –

“This meeting once again demonstrates that the Fed is willing to do what is necessary to bring inflation under control. It will slow demand by keeping rates higher for longer — even if this means growth and jobs are lost,” said Christian Scherrmann, of asset management firm DWS.

“The current view of the central bankers is still that this will cause a slowdown, but not a recession. We fully agree that bitter medicine to win back price stability is necessary. But we fear its side-effects will be harsher than the Fed is currently projecting.”

And Fidelity International’s Anna Stupnytska said a long-hoped-for change of direction from the Fed “now seems further away”, though added that a significant tightening of monetary financial conditions could see an earlier pause in the rate hikes.

The Swiss central bank followed up Thursday with a 0.75 percentage point hike and Norway lifted its rate to an 11-year high. Indonesia and the Philippines also tightened policy.

Investors are now preparing for a large move from the Bank of England later in the day.

Still, the Bank of Japan decided not to shift from its ultra-loose measures owing to its determination to kickstart the country’s torpid economy. The decision leaves it as the only major central bank with negative rates, a policy that has sent the yen plunging 20 percent this year.

However, the currency got a bounce after the finance ministry stepped into the currency markets, pushing the dollar back below 143 yen.

Other currencies were also under pressure, with the euro wallowing at a 20-year low and sterling touching a fresh 37-year nadir of $1.1221.

The greenback was also at multi-year highs on the South Korean won, Chinese yuan, Australian dollar and Canadian dollar, among others.

Oil prices edged up after a rollercoaster Wednesday.

Both contracts spiked in reaction to President Vladimir Putin’s announcement of a partial mobilisation of the Russian army and a veiled threat to use nuclear weapons against the West.

But they soon retreated as investors once again turned to the likely impact on demand from an expected recession across world economies.

– Key figures at around 0810 GMT –

Tokyo – Nikkei 225: DOWN 0.6 percent at 27,153,83 (close)

Hong Kong – Hang Seng Index: DOWN 1.6 percent at 18,147.95 (close)

Shanghai – Composite: DOWN 0.3 percent at 3,108.91 (close)

London – FTSE 100: DOWN 0.4 percent at 7,209.75

Dollar/yen: UP at 142.63 yen from 144.02 yen Wednesday

Pound/dollar: DOWN at $1.1275 from $1.1275

Euro/dollar: DOWN at $0.9840 from $0.9847

Euro/pound: UP at 87.25 pence from 87.31 pence 

West Texas Intermediate: UP 0.6 percent at $83.46 per barrel

Brent North Sea crude: UP 0.7 percent at $90.41 per barrel

New York – Dow: DOWN 1.7 percent at 30,183.78 (close)

Almost every week now, European governments are announcing emergency measures to protect households and businesses from the energy crisis stemming from Russia’s war in Ukraine.

Hundreds of billions of euros — and counting — have been shelled out so far since Russia invaded its pro-Western neighbour in late February.

Governments have gone all out: from capping gas and electricity prices to rescuing struggling energy companies and providing direct aid to household to fill up their cars.

The public spending has continued even though European Union countries already accumulated mountains of new debt to save their economies from the fallout of the Covid pandemic in 2020.

But some leaders have taken pride at their use of the public purse to battle this new crisis, which has sent inflation soaring, raised the cost of living and sparked fears of recession.

After announcing 14 billion euros ($13.9 billion) in new measures last week, Italian Prime Minister Mario Draghi boasted that this put Italy “among the countries that have spent the most in Europe”.

The Bruegel institute, a Brussels-based think tank tracking energy crisis spending by EU government, ranks Italy as the second-biggest spender in Europe after Germany.

Rome has allocated 59.2 billion euros since September 2021 to shield households and businesses from the rising energy prices, accounting for 3.3 percent of its gross domestic product.

Germany tops the list with 100.2 billion euros, or 2.8 of its GDP, as the country was hit hard by its heavy reliance on Russian gas supplies, which have dwindled in suspected retaliation over Western sanctions against Moscow for the war.

On Wednesday, Germany announced the nationalisation of troubled gas giant Uniper.

France, which shielded consumers from gas and electricity price rises as early as November, ranks third with 53.6 billion euros allocated so far, representing 2.2 percent of GDP.

– Spending to rise –

EU countries have now put up 314 billion euros so far since September 2021, according to Bruegel.

“This number is set to increase as energy prices remain elevated,” Simone Tagliapietra, a senior fellow at Bruegel, told AFP.

The energy bills of a typical European family could reach 500 euros per month early next year, compared to 160 euros in 2021, according to US investment bank Goldman Sachs.

The measures to help consumers have ranged from a special tax on excess profits in Italy to the energy price freeze in France and subsidies public transport in Germany.

But the spending follows a pandemic response that increased public debt, which in the first quarter accounted for 189 percent of Greece’s GDP, 153 percent in Italy, 127 percent in Portugal, 118 percent in Spain and 114 percent in France.

“Initially designed as a temporary response to what was supposed to be a temporary problem, these measures have ballooned and become structural,” Tagliapietra said.

“This is clearly not sustainable from a public finance perspective. It is important that governments make an effort to focus this action on the most vulnerable households and businesses as much as possible,” he said.

– Budget reform –

The higher spending comes as borrowing costs are rising.

The European Central Bank hiked its rate for the first time in more than a decade in July to combat runaway inflation, which has been fuelled by soaring energy prices.

The yield on 10-year French sovereign bonds reached an eight-year high of 2.5 percent on Tuesday, while Germany now pays 1.8 percent interest after boasting a negative rate at the start of the year.

The rate charged to Italy has quadrupled from one percent earlier this year to four percent now, reviving the spectre of the debt crisis that threatened the eurozone a decade ago.

“It is critical to avoid debt crises that could have large destabilizing effects and put the EU itself at risk,” the International Monetary Fund warned in a recent blog calling for reforms to budget rules.

The EU has suspended until 2023 rules that limit the public deficit of countries to three percent of GDP and debt to 60 percent.

The European Commission plans to present next month proposals to reform the 27-nation bloc’s budget rules, which have been shattered by the crises. 

Hong Kong is set to end the year in the midst of a full-blown recession, the city’s finance chief warned Thursday, as spiralling interest rates join strict Covid-19 controls in hammering the economy.

“There is a very high chance for Hong Kong to record a negative GDP growth for this year,” Financial Secretary Paul Chan told reporters, adding that interest rates were being raised “at a pace that was never seen in the past three decades”.

The Chinese city’s monetary policy moves with the Federal Reserve because its currency, one of the cornerstones of its business hub reputation, is pegged to the US dollar.

The Fed’s hawkish rate hikes, aimed at curbing soaring inflation, come at an especially difficult time for Hong Kong, dampening sentiment when the economy is already struggling.

The city is currently in a technical recession — recording two consecutive quarters of negative growth this year.

The government has adhered to a version of China’s zero-Covid policy for more than 2.5 years, enforcing strict coronavirus controls and mandatory quarantine for international arrivals.

Quarantine, once as long as three weeks, has been reduced to three days. The government has signalled it may soon join the rest of the world in scrapping travel curbs.

Chan signalled his support for making travel and business easier. 

“The aspects related to the pandemic need to continue to improve in order for us to see larger investments because people are more cautious in a high interest rates environment,” he said.

– ‘Falling behind’ –

Business leaders have long been warning that the pandemic controls, combined with Beijing’s ongoing crackdown on dissent, have made it harder to attract talent and cut off Hong Kong internationally, especially as rivals reopen.

The city has seen a net outflow of more than 200,000 people in the last two years, a record population drop.  

“Hong Kong should be ahead of other Asian cities. But now there’s a feeling that we’re falling behind and being left isolated,” Eden Woon, the new head of the city’s American Chamber of Commerce told the South China Morning Post in an article published Thursday. 

“There are people leaving and the problems of retaining talent. All these things add up together and need to be addressed,” he added.

But earlier this week a senior Chinese official said it was “inappropriate” to say the city was seeing an exodus. 

“Hong Kong’s population drop is caused by various factors and there is no way to suggest that it is a result of an emigration wave,” Huang Liuquan, deputy director of the Hong Kong and Macau Affairs Office, said Tuesday. 

The Fed’s rate hikes hit Hong Kong’s stock market which fell as much as 2.6 percent on Thursday, to 17,965.33, the lowest since December 2011.

The Hang Seng Index has been one of the worst performing top bourses in the past two years, shedding more than 22 percent since the start of January following last year’s 14 percent drop.

While the Hong Kong Monetary Authority has no choice but to follow the Fed, major banks such as Standard Chartered and HSBC had resisted that pressure. 

But on Thursday, HSBC raised its prime lending rate in Hong Kong by 12.5 basis points to 5.125 percent, the bank’s first rise in four years.

Others are likely to follow suit. 

That could impact the city’s once white hot property sector with Goldman Sachs Group estimating prices may slide by about 20 percent over the next four years. 

Hong Kong also saw a recession in 2019 when months of huge and sometimes violent democracy protests rocked the city.