Ray V and Vidya Ranganathan
(Reuters) – The yen suddenly jumped against the dollar on Monday as traders cited Japanese authorities’ intervention to buy the yen to try to stop the currency’s relentless slide to levels last seen more than three decades ago.
The yen rose sharply to 155.01 per dollar from 160.245 earlier in the day. Trade sources said Japanese banks were selling dollars for yen. The last time the dollar was worth 157.10 yen.
Traders have been on edge for weeks for any sign of Tokyo moving to support the currency, which has fallen 11% against the dollar this year. The yen fell to a 34-year low despite the central bank exiting negative interest rates last month in a historic move.
Currency traders are betting that despite the changes, Japanese rates will remain low for some time, in contrast to relatively high interest rates in the United States.
Japan’s chief currency diplomat Masato Kanda declined to comment when asked whether authorities had intervened.
“I won’t comment now,” Kanda, the finance undersecretary for international affairs, told reporters.
Japan’s Finance Ministry was not immediately available for comment as the country’s markets were closed for a holiday on Monday.
“This move has all the hallmarks of actual BOJ intervention, and what better time to do it than a public holiday in Japan, which means less liquidity and a bigger return on the BOJ’s investment,” said Tony Sycamore in Sydney. Market Analyst IG.
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The yen has fallen steadily for more than three years and has lost more than a third of its value against the dollar since the start of 2021. In real terms, the yen was at its weakest since at least the 1970s.
NEW LINE IN THE SAND?
A weaker yen is a boon for Japanese exporters but a headache for policymakers as it raises the cost of imports, increases inflation pressures and squeezes households.
The yen rose nearly 3.5 yen between 158.445 and 154.97 on Friday as traders expressed disappointment that the Bank of Japan kept its policy settings unchanged last week, offering little guidance on reducing purchases of Japanese government bonds (JGBs). – a move that some traders believe will put a floor under the currency.
Bank of Japan Governor Kazuo Ueda said at a news conference after the meeting that monetary policy does not directly target exchange rates, although exchange rate volatility can have significant economic consequences.
The yen came under pressure as interest rates in the United States rose and remained near zero in Japan, prompting investors to cash out yen and buy higher-yielding dollars to earn so-called carry.
The yield gap between US and Japanese 10-year government bonds is about 375 bps, providing a powerful incentive for yen bears.
Christopher Wong, currency strategist at OCBC in Singapore, said such a large difference “may indicate that intervention may not be as effective.”
“Hence, the combination of the Bank of Japan demonstrating urgent policy normalization and the Treasury conducting foreign exchange intervention is likely to be more effective than the Treasury conducting alone.”
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The alleged intervention came days before the Federal Reserve’s May 1 policy review. Expectations for a Fed rate cut were put on hold throughout the year as U.S. inflation remained high. Policymakers including Fed Chairman Jerome Powell have stressed that rate changes will depend on the data.
To support the Japanese currency, the authorities need to use Japan’s dollar reserves to sell for yen. Under this process, the Minister of Finance issues an intervention order, and the Bank of Japan implements the order as the ministry’s agent.
Japan intervened three times in 2022, selling the dollar to buy the yen in September and October when the yen fell to 152 to the dollar, a 32-year low at the time. Tokyo is estimated to have spent 9.2 trillion yen ($60.78 billion) defending the currency.
Earlier this month, the United States, Japan and South Korea agreed to “consult closely” on currency markets, issuing a rare warning, while Tokyo stepped up its rhetoric against the yen’s excessive movements.
The yen also hit multi-year lows against the euro, Australian dollar and US dollar.
“Today’s move, if it represents government intervention, is unlikely to be a one-off,” said Nicholas Chia, Asia macro strategist at Standard Chartered (OTC:) Bank in Singapore.
“We can likely expect further action from the Treasury if USD-JPY rises back to 160. In some ways, the 160 level represents a pain threshold or a new line in the sand for the authorities.”