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.
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 caused the yen to fall to 145 per 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 abroad.
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 March 27 that authorities could take “decisive steps” against the yen’s weakness – language he has not used since the 2022 intervention.
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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 warnings failed to stop the yen’s fall, South Korea and Japan won the United States acknowledge their “serious concerns” about the decline of their currencies at a trilateral meeting in Washington last week.
The impact of the agreement on the market did not last long. The dollar extended its gains and hit a 34-year high of 155.74 yen on Thursday, breaking above the 155 level seen by authorities as a line in the sand for intervention.
NEXT 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.
Although the dollar has risen above the psychologically important 155 level, recent gains have been gradual and driven primarily by the difference in US and Japanese interest rates. This may prevent Japan from arguing that the yen’s recent fall is inconsistent with fundamentals and requires intervention.
Some market players believe Japanese authorities’ next line in the sand could be 160. Ruling party chief Takao Ochi told Reuters that a fall in the yen to 160 or 170 against the dollar could prompt policymakers to act.
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 react. This was the case when Tokyo intervened in 2022.
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Prime Minister Fumio Kishida may feel pressure to prevent the yen from falling further, driving up the cost of living, as his approval ratings fall ahead of the ruling party’s leadership race in September.
But 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, authorities must use Japan’s foreign exchange reserves to exchange dollars 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?
The Japanese authorities consider it important to enlist the support of the 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.
Finance Minister Suzuki said a meeting last week with his US and South Korean counterparts laid the groundwork for action against the yen’s excessive movements, a sign that Tokyo sees the meeting as Washington’s informal agreement to intervene if necessary.
US Treasury Secretary Janet Yellen said foreign exchange interventions should only be undertaken in “very rare and exceptional circumstances” when markets are in disarray and excessive volatility. She declined to comment on the value of the yen.
The looming U.S. presidential election could complicate Japan’s decision on whether and when to intervene.
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In a social media post on Tuesday, Republican presidential candidate Donald Trump condemned the yen’s historic fall against the dollar, calling it a “total disaster” for the United States.
There is no guarantee that intervention will effectively reverse the low yield environment, which is driven largely by expectations of continued low interest rates in Japan. Bank of Japan Governor Kazuo Ueda declined to hint at another rate hike, but stressed that the bank would act cautiously given Japan’s fragile economy.