Japan's Yen Lesson for India: Currency Intervention is a Band-Aid

Japan's experience has a crucial lesson for India as it tries to manage its currency. In January, Japan intervened in the yen-dollar exchange rate by purchasing over $100 billion worth of yen to prop up its sliding currency against the dollar. This intervention was repeated in April and May when Japan purchased $73 billion worth of yen, but the effort only provided a temporary reprieve.

The joint US-Japan intervention in July pushed the yen up to 155 to the dollar, yet less than two weeks later, almost half of the yen's gains from the intervention had evaporated. The US' ulterior motive behind this intervention appears to have been limiting Tokyo's sale of US Treasury securities, which could push bond yields higher.

The Japanese finance ministry has stated that it will continue to intervene to stabilize the yen, but experts warn that currency intervention is only a short-term band-aid for underlying problems. Japan has one of the highest debt-to-GDP ratios among advanced economies, exceeding 200%, and its fiscal stimulus programme could further increase this ratio.