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 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 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.
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.
Warnings kept the dollar from breaking above the psychologically important 152 yen level until Wednesday, when the release of strong U.S. inflation data pushed the pair higher above 153, its highest level since 1990.
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.
Japan’s former top currency diplomat Tatsuo Yamazaki told Reuters authorities would likely intervene if the yen breaks out of the range it has been in for years and falls well below 152 to the dollar. Another former currency diplomat, Hiroshi Watanabe, put the line in the sand at 155.
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?
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. 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.
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 dismissed signs of another rate hike but stressed the bank would act cautiously given Japan’s fragile economy.