Japan may introduce tax breaks to spur repatriation into yen
Business
Market data suggests $35bn intervention on Monday to prop up Japanese currency
- Central bank money market projections showed it anticipated a surge in yen receipts on Wednesday
- Interest rate differentials when mainly compared with the US responsible for its weakness
TOKYO (Reuters/Web Desk) – Japan may introduce measures to provide tax breaks for companies converting foreign profits into the yen and include it in the government's annual mid-year policy blueprint compiled in the summer, the Sankei newspaper reported.
The tax holiday may be deployed as a policy tool to stem the yen's sharp declines, incentivising firms to return overseas assets to Japan, the newspaper reported on Tuesday.
A finance ministry official was not immediately available for comment on Wednesday.
The yen has slumped about 11 per cent against the dollar so far this year as currency traders bet Japanese interest rates will remain low for some time in contrast to relatively high US interest rates.
The tax break would be applied for about 20 trillion yen ($126.74 billion) worth of "foreign direct investment earnings" from companies' overseas subsidiaries, the Sankei reported.
Some government officials are sceptical, telling Reuters prior to the newspaper report that favourable tax treatment has already been in place and that additional measures are likely to have an impact.
$35BN YEN INTERVENTION
Earlier on Tuesday, top currency diplomat Masato Kanda said Japan stands ready to deal with foreign exchange matters around the clock, as money market data suggested the finance ministry had spent around $35 billion to prop up the sliding yen a day earlier.
Kanda would not say whether the authorities were behind the currency's surge on Monday, but traders and a former Japanese official said it had all the markings of an intervention.
"We are ready 24 hours, so whether it's London, New York or Wellington, it doesn't make a difference," the vice finance minister for international affairs told reporters.
Central bank money market projections published late on Tuesday showed it anticipated a surge in yen receipts on Wednesday, which might point to heavy yen buying on Monday as foreign exchange trades typically take two days to settle.
Read more: Inflation-wary US rate options market cautiously prices for more Fed hikes
The data suggests the spending may have been close to the daily record 5.62 trillion yen – nearly $36 billion at current exchange rates – when Japan intervened in October 2022. If it has done so again, it also signals that after weeks of rhetoric it is willing to tackle the currency's weakness.
Factors other than foreign exchange intervention can influence money market balances.
Prime Minister Fumio Kishida earlier on Tuesday also refused to be drawn into discussing foreign exchange moves or interventions.
While Kanda side-stepped direct questions about intervention, he said the authorities would act if excessive moves triggered by speculators negatively impact the daily lives of people.
"Higher prices of import goods are said to be affecting most vulnerable people and could be a drag on Japan's momentum to raise actual wages," he said.
"The government would need to respond to such moves."
HIGHLY LIKELY
The yen has been falling for years as global interest rates have shot up in response to resurgent inflation while Japan's have stayed near zero.
That gap has driven money out of yen and into other better-yielding currencies and even in March, when Japan hiked rates for the first time since 2007, the yen fell.
Momentum and fading expectations of rate cuts in the United States have also helped push down the yen, which has lost more than third of its value on the dollar since early 2021 and brought Japan into the market to defend its currency in 2022.
Former top currency diplomat Mitsuhiro Furusawa told Reuters it was highly likely Japan had acted again this week.
Krishna Srinivasan, director of the IMF's Asia and Pacific Department, said the lender sees Japanese authorities fully committed to a flexible exchange rate regime and is in close talks with them.
While the yen's recent weakness largely reflects interest rate differentials, other factors are playing an increasing role in the moves, including large carry trade positions, he said, speaking in Singapore. He declined to comment specifically on yen moves of the past few days.
In carry trades, investors borrow a currency with low interest rates, such as the yen, and sell it to buy higher-yielding currencies.
The Group of Seven (G7) finance leaders this month agreed to a Japanese proposal to reaffirm that excessive volatility and disorderly moves in the currency market were undesirable.
In the first trilateral finance dialogue since last year's three-way summit at Camp David, the US, Japan and South Korea agreed to consult on currency markets, acknowledging concern in Tokyo and Seoul about their slumping currencies.
The meetings were broadly seen as giving Tokyo approval to step into the foreign exchange market.
