Analysis: Japan is chasing its tail on yen intervention

Japanese yen banknotes can be seen in this illustration photo, taken Sept. 22, 2022. REUTERS/Florence Lo/Illustration

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SINGAPORE, Sept. 23 (Reuters) – As the Bank of Japan enters foreign exchange markets for the first time in decades to defend a battered yen, it faces a host of obstacles, most notably its own stubborn commitment to ultra-easy monetary institutions.

The sudden burst of Japanese authorities to buy up the yen — for the first time since 1998 — caused a large movement of 6 yen between 140 and 146 in the dollar – yen exchange rate .

At the end of the busy day, as markets also processed an aggressive rise in Federal Reserve interest rates and a promise from the BOJ to keep rates negative, investors were no less bearish about the yen, which has seen its year-to-date decline. has fallen in value by almost 20%.

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

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

But the BOJ’s policies are at odds even at home, with a government concerned about the impact of a weak yen on energy prices and consumer confidence, and its risk-loving households with inactive cash reserves worth more than 1,000 trillion yen ( $7.04 trillion) ready to hunt for higher-yielding assets abroad read more .

Governor Haruhiko Kuroda made it clear that the policy will not change, and even the yen the BOJ buys as part of intervention will be replaced.

As long as the BOJ had a policy of controlling the yield curve, any monetary tightening resulting from the purchase of the yen would be neutralized, he said Thursday, citing the BOJ’s consistent weekly bond buying transactions to limit yields.

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Brendan McKenna, international economist and currency strategist at Wells Fargo Securities, points out that even as the intervention took place, U.S. interest rates rose about 6 basis points on the day and Japanese interest rates fell, causing a larger wedge in interest rates and markets more reason to dump the yen.

“That the intervention was unilateral and that it happened on the same day of a dovish Bank of Japan meeting speaks to the very great internal contradictions,” said George Saravelos, Deutsche Bank’s head of currency strategy, in a note.


Saravelos says such intervention, while Japan maintains a policy that controls the yield curve, will lead to a loss of credibility for the central bank, and could help reduce some speculative positions in the yen without really changing the trend.

“Intervention to strengthen the currency is at odds with the Bank of Japan’s policy,” Deutsche said, saying it was simply not credible for a central bank to lower its currency through extreme amounts of quantitative easing, while authorities issued a stronger currency. were pursuing at the same time.

Citi analysts noted how the 1997-98 period of yen buying intervention failed to reverse the depreciation.

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Unlike now, yields were far apart back then, but not against the yen. while the Boj intervened heavily between April and June 1998, the yen only bottomed out in September.

Reuters Graphics Reuters Graphics

Yet it is still early. UBS strategist James Malcolm thinks the intervention could be a multi-month concerted campaign given its speculative positioning against the yen and Japan’s war chest of nearly $1.3 trillion in foreign exchange reserves.

He points to Japan’s non-resident lending that reached an all-time high of $315 billion in the 12 months to July, three-quarters of that in the short term, most of which has been built up since March.

“The success of an intervention is measured not in days, but in decades,” wrote Malcolm, noting that Japanese authorities last bought about $150 billion at nearly 75 yen in 2011. Some of it is now being published, he thinks.

(This story has been re-saved to paraphrase paragraph 8 comments)

($1 = 142,0800 yen)

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

Our Standards: The Thomson Reuters Trust Principles.

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