Analysis: Japan chasing intervention on the yen

Japanese yen banknotes can be seen in this illustrative photo taken on 22 September 2022. REUTERS / Florence Lo / Illustration

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SINGAPORE, Sept. 23 (Reuters) – As the Bank of Japan enters currency markets for the first time in decades to defend a battered yen, it is facing numerous hurdles, most notably its own stubborn commitment to ultra-easy monetary settings.

The sudden yen buying intervention on Thursday by the Japanese authorities – the first case since 1998 – caused a large 6 yen shift between 140 and 146 in the dollar-yen exchange rate.

At the end of the busy day, which also saw markets digest a hawkish Federal Reserve rate hike and the BOJ’s commitment to hold negative rates, investors were no less bearish on the yen, which this year has been. it has depreciated by almost 20% so far.

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“It’s quite symbolic in the sense that this is the first time since 1998, but I don’t think it will be effective in reversing the yen’s trend,” said Vincent Tsui, an Asian analyst at Gavekal Research in Hong Kong.

Given a history of deflation, the Bank of Japan’s desire to keep rates low until it sees stable and healthy price hikes has made it a lone dove this year as other major global central banks aggressively raise rates to contain the rise in inflation. US policy rates are now 3 percentage points higher than Japan’s.

But the BOJ’s policy is also at odds at home, with a government worried about the impact of a weak yen on energy prices and consumer sentiment, and its risk-loving families with idle cash reserves worth over 1,000 trillion yen ($ 7.04 trillion) hovering on the hunt for more profitable assets overseas read more.

Governor Haruhiko Kuroda has made it clear that the policy will not change and the yen the BOJ is buying as part of the intervention will also be replaced.

As long as the BOJ had a policy of controlling the yield curve, any monetary tightening caused by the yen buying intervention would be neutralized, he said Thursday, referring to the BOJ’s large weekly bond buying operations to limit returns.

Brendan McKenna, an international economist and currency strategist at Wells Fargo Securities, points out that even though the intervention took place, US yields rose about 6 basis points over the day and Japanese yields fell, resulting in a larger wedge in rates. of interest and giving markets even more reasons to dump the yen.

“The fact that the intervention was unilateral and that it took place on the same day as an accommodating meeting of the Bank of Japan speaks to the huge internal contradictions,” Deutsche Bank’s head of FX strategy George Saravelos said in a statement.


Saravelos says such action, while Japan sticks to a policy of controlling the yield curve, will result in a loss of credibility for the central bank and could help reduce some speculative positions on the yen without really changing the trend.

“The intervention to strengthen the currency is in direct contradiction to Bank of Japan policy,” Deutsche said, and that it was simply not credible for a central bank to devalue its currency through extreme amounts of quantitative easing while the authorities pursued a stronger currency at the same time.

Citi analysts noted that the 1997-98 yen buying intervention failed to reverse its depreciation.

Unlike now, yields were very far back then but did not move against the yen. while the boj intervened heavily between April and June 1998, the yen did not score until September.

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Still, it’s the first few days. UBS strategist James Malcolm believes the intervention could be a concerted campaign lasting many months given the speculative positioning against the yen and Japan’s war chest of nearly $ 1.3 trillion in foreign exchange reserves.

It points to Japan’s lending to non-residents which hit a record high of $ 315 billion in the twelve months to July, and three-quarters of which were short-term, most of which accumulated since March.

“The success of the intervention is not measured in days, but rather in decades,” Malcolm wrote, indicating that the Japanese authorities last bought about $ 150 billion at nearly $ 75 yen in 2011. Some of this is spent. now, according to him.

(This story has been reworked to paraphrase the comments in paragraph 8)

($ 1 = 142,0800 yen)

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Additional reports by Bansari Mayur Kamdar in Bangalore, Leika Kihara in Tokyo, Tom Westbrook and Rae Wee in Singapore; Editing by Kim Coghill

Our Standards: Thomson Reuters Trust Principles.


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