Lake Kihara
TOKYO (Reuters) – Japanese authorities face renewed pressure to combat the persistent depreciation of the yen as traders push the currency lower on expectations that further interest rate hikes by the central bank will be slow.
The yen rose after Tokyo issued its strongest warning to date on Wednesday about the possibility of imminent intervention, breaking from a 34-year low of 151.97 against the dollar hit earlier in the day.
Below is a detailed description of how the yen buying intervention works:
LAST CONFIRMED YEN BUYING INTERVENTION?
Japan bought the yen in September 2022, its first foray into the market to strengthen its currency since 1998, after the Bank of Japan’s (BOJ) decision to maintain its ultra-loose monetary policy sent the yen down to 145 to the dollar. It intervened again in October after the yen fell to a 32-year low of 151.94.
WHY BUILD IN?
Intervention to buy the yen is rare. More often, the Treasury sold the yen to prevent its rise from damaging the export-dependent economy by making Japanese goods less competitive overseas.
But the yen’s weakness is now seen as a problem as Japanese firms have moved production overseas and the economy is heavily dependent on imports of goods ranging from fuel and raw materials to machine parts.
WHAT HAPPENS FIRST?
When Japanese authorities intensify their verbal warnings, saying they are “ready to act decisively” against speculative activities, it is a sign that intervention may be imminent.
The Bank of Japan’s rate check – where central bank officials call dealers and ask for yen buying or selling rates – is seen by traders as a possible sign of intervention.
WHAT HAPPENED BEFORE TODAY?
Finance Minister Shunichi Suzuki told reporters on Wednesday that authorities could take “decisive steps” against the yen’s weakness – language he has not used since the 2022 intervention.
Hours later, Japanese authorities held an emergency meeting to discuss the weak yen. The meeting is usually held as a symbolic gesture to markets that authorities are concerned about the currency’s rapid movements.
After the meeting, Japan’s top currency diplomat Masato Kanda said the yen’s recent move had been too fast and out of step with fundamentals, suggesting Tokyo saw enough reason to intervene to stop the currency from falling further.
LINE IN THE SAND?
Authorities say they look at the speed of the yen’s fall, not the level, and whether the moves are driven by speculators, to decide whether to enter the foreign exchange market.
As the dollar breaks through the levels that triggered intervention in 2022, market players see a sharp move above 152 yen and then 155 yen as the next threshold.
WHAT IS THE TRIGGER?
The decision is highly political. When public anger over a weak yen and subsequent rising costs of living is high, it forces the administration to respond. This was the case when Tokyo intervened in 2022.
If the yen’s fall accelerates and angers the media and public, the likelihood of intervention will increase again.
The decision will not be easy. Intervention is costly and could easily fail, given that even a large surge in yen buying would pale in comparison to the $7.5 trillion that changes hands daily in the foreign exchange market.
HOW WILL THIS WORK?
When Japan intervenes to stop the yen from rising, the Treasury issues short-term bills, boosting the yen, which it then sells to weaken the Japanese currency.
However, to support the yen, the authorities must use Japan’s foreign exchange reserves to obtain dollars and sell them for yen.
In either case, the Minister of Finance issues an order to intervene, and the Bank of Japan executes the order as the ministry’s agent.
CHALLENGES?
Intervention to buy yen is more complex than to sell yen.
Although Japan has about $1.3 trillion in foreign exchange reserves, they could be significantly eroded if Tokyo intervenes repeatedly, leaving authorities limited in how long they can defend the yen.
Japanese authorities also consider it important to enlist the support of G7 partners, especially the United States, if the intervention is related to the dollar.
Washington has tacitly approved Japan’s intervention in 2022, reflecting recent close bilateral relations. There is uncertainty about whether the same thing will happen the next time Japan considers intervention.
The looming U.S. presidential election may discourage Japanese officials from intervening, given the risk of attracting unwanted attention and criticism from Washington for market interference.