The Japanese yen entered a new phase of repricing, after foreign reserves recorded the largest monthly decline ever, coinciding with the rise of the currency to its strongest level in 7 months, at a time when expectations are increasing that the Bank of Japan will raise interest rates this month, and that it will be followed by further tightening in the coming months.
Japanese Ministry of Finance data showed that foreign reserves fell to $1.208 trillion at the end of August, from $1.287 trillion in July, a record decline of $79.6 billion, or 6.18 percent. The bulk of this decline is related to the decline in the value of foreign securities held by Japan, most of which are US Treasury bonds, which represent about 70 percent of reserves.
A significant proportion of these assets are due to previous interventions in the exchange market, when Tokyo was buying dollars to limit the strength of the yen about two decades ago.
But the sharp decline this time also reflects the unprecedented scale of intervention carried out by Japanese authorities over the summer. Tokyo spent 15.4 trillion yen, equivalent to about $98.7 billion, between July 30 and August 26 on selling dollars and buying yen, the largest amount of intervention recorded in a single month. This intervention helped push the yen away from its lowest level in 40 years near 164 yen to the dollar, rising to 155.20 yen by August 3.
Although the currency later returned to approaching 160 yen, the trend reversed again at the beginning of September. On Monday, the yen recorded its highest level in 7 months. The dollar fell by more than 1 percent to 154.58 yen, the lowest level since February, while the euro fell 0.8 percent to 179.97 yen. This means that the currency's ultimate strength no longer depends solely on direct intervention; Rather, it is supported by changes in monetary policy expectations and capital flows.
Markets are almost completely pricing in the Bank of Japan raising interest rates by 25 basis points to 1.25 percent during its meeting on September 17-18. Expectations are also increasing that the bank will continue to tighten at a faster pace than it has been accustomed to since the start of the normalization cycle.
Strong signal
A striking signal came from Takuji Ida, economic advisor to Prime Minister Sanae Takaichi, who said that the Bank of Japan is likely to raise interest rates in September, then raise them again by January, before then returning to a pace closer to one increase every 6 months. Aida's statements gain special importance. Because he is known historically for his position in support of monetary easing and his opposition to raising interest rates quickly. Therefore, his move to expect an imminent hike reflects the widening circle of acceptance within the government itself, of the necessity of tightening monetary policy to reduce the weakness of the yen and the risks of inflation.
Ida said that September represents a narrow window to take a step before the start of an extraordinary parliamentary session in October, during which the government will discuss a project to suspend the 8 percent consumption tax on food for two years.
Although he supported the imminent lift, Ida warned that premature acceleration of tightening could put pressure on the economy. This puts the Bank of Japan in front of a delicate equation: supporting the yen and reducing inflation on the one hand, and avoiding harming domestic demand and investment on the other hand.
Bank of Japan Governor Kazuo Ueda confirmed last week that the bank would discuss whether inflationary risks were increasing, including during the September meeting, in a signal that the markets considered a clear prelude to raising interest rates.
Statements by US Treasury Secretary Scott Besent increased these pressures. He expressed his strong support for “decisive” monetary steps to confront the weak yen, which contributed to strengthening investors’ conviction that the Bank of Japan is closer to tightening.
Independence
On the other hand, Finance Minister Satsuki Katayama stressed that monetary policy decisions remain within the jurisdiction of the Bank of Japan, in an attempt to maintain the separation between the bank’s independence and internal and external political pressures. These developments come after a joint Japanese-American intervention in the exchange market during the summer, the first of its kind between the two countries since 2011. This constituted an important shift in the management of the yen crisis, after Washington moved from monitoring to direct participation in supporting the Japanese currency.
To reassure the markets that Japan's ability to intervene does not depend solely on selling its reserves, Tokyo and Washington indicated the possibility of using a reserve mechanism affiliated with the Federal Reserve Board, which was established during the “Covid-19” pandemic, and allows major central banks to obtain liquidity in dollars without the need to sell US Treasury bonds directly. This mechanism gains importance as reserves decline. Because it reduces the risk of Japan being forced to liquidate huge amounts of US assets, which in turn could put pressure on the Treasury market and raise global yields.
The yen also currently supports the prospects of a portion of Japanese capital returning from abroad to the country, with the rise in local bond yields and the increasing attractiveness of yen-denominated assets.
Multiple engines
Therefore, the yen no longer moves only according to the traditional interest differentials with the United States; Rather, it is also affected by official intervention, expectations of interest increases, the repatriation of Japanese funds, and changing investor appetite for local assets. The result is that Japan has become less dependent on direct intervention alone to defend its currency, but it has paid a large financial price to achieve this transformation. The record decline in reserves demonstrates the extent of the cost, while the yen's rise to its highest level in 7 months reflects that markets have finally begun to take the prospects of monetary tightening more seriously.
The Bank of Japan meeting in September will be the crucial test. If the bank raises interest rates and keeps the door open for additional increases, the yen may receive more sustainable support. However, if the message is less stringent than expected, pressures may return quickly, putting Tokyo back to the dilemma of using reserves again or accepting greater currency weakness. In any case, Japan appears to have moved from the stage of tactical defense of the yen to the stage of complete rebuilding of the monetary policy equation and the exchange market, in one of the most sensitive periods for the Japanese currency in decades.
Saudi Arabia is moving to reorganize the external outsourcing market, in a move aimed at limiting the exit of part of spending and expertise outside the Kingdom, and enhancing the ability of local companies to provide services that government agencies and establishments rely on. This step comes in parallel with the Kingdom’s move to maximize the impact of government spending and develop local content, through the localization of businesses and services that can be implemented within the Saudi market, the creation of quality jobs, and the development of specialized local companies.
In this context, the competent authorities in Saudi Arabia, in partnership with representatives of the private sector, are studying a plan to regulate the external outsourcing sector and reduce economic leakage, after ensuring the readiness of local authorities to shift towards national competencies, and identifying the specializations targeted for gradual nationalization, in line with the goals of “Vision 2030” in creating quality jobs within the Saudi market.
External outsourcing is the entrusting of services or operations for an entity inside Saudi Arabia to a specialized external company or party, instead of implementing them with its employees or internal resources, and its goal is to provide financial savings to the entity.
According to private information, the Federation of Saudi Chambers, in partnership with the Ministry of Commerce and the Ministry of Economy and Planning, prepared a study on the impact of localization of outsourcing business on Saudi establishments, with the aim of measuring the extent of reliance on these services outside the Kingdom, and assessing the extent of the institutionalization of localization of these businesses, in a way that contributes to supporting decision-making and developing related opportunities.
Specialized competencies
The study examines the main reasons for using an external provider instead of a local one, whether it is quality of service, low cost, availability of specialized competencies, speed of implementation, or lack of a local alternative at the same level.
The study determined the extent of entities’ readiness to transfer these services to a local provider within 12-24 months, with the most prominent obstacles expected upon localization, whether they are the local competency gap, the relative high cost, the risk of service interruption during the transition, the complexity of data migration, or the lack of a reliable local provider of the same size.
The importance of localizing this system lies in keeping spending within the Saudi economy, creating quality jobs for citizens, building specialized local companies, transferring knowledge and technology, as well as enhancing business continuity and operational sovereignty, and raising the quality of government services.
The localization of this sector increases the proportion of Saudis in jobs, and contributes to building an integrated local capacity that government agencies and companies can rely on instead of a large portion of spending and expertise going to external suppliers.
Maximizing government spending
This becomes increasingly important as the Kingdom moves towards maximizing the impact of government spending and local content. The definition of local content includes the participation of Saudi elements in the workforce, goods, services, assets, and technology.
When a Saudi entity assigns a service to a local company, a larger portion of the contract value is transformed into salaries, suppliers, technology, training, and investments within the Kingdom, rather than the value leaking outside of it. This is directly aligned with the goal of local content development.
Outsourcing also includes broad sectors, such as information technology, call centers, shared services, accounting, human resources, data analysis, operation and maintenance, and consulting. It can thus be a means of providing functions at different levels, not just operational functions.
Local content weighting mechanism
Last April, the Local Content and Government Procurement Authority announced the implementation of the mechanism of weighing local content in the financial evaluation of competitions, works, and purchases of government agencies for management consulting activity and information technology services, in addition to requiring a minimum level of local content at the facility level to enter management consulting activity competitions, as part of its ongoing efforts to develop local content and maximize the benefit from government business and procurement.
The authority explained that a minimum local content at the establishment level of 30 percent will be required for management consulting competitions in two stages. It begins in early April 2027 for competitions with an estimated cost of 10 million riyals ($2.6 million) or more, and will later include competitions with an estimated cost of 5 million riyals or more starting in January 2028.
