On April 29th, according to Reuters, the yen surged against the dollar. Traders attributed this rise to yen-buying intervention by Japanese authorities, sparking a rebound in a currency that had been at levels not witnessed in over three decades.
The dollar plummeted to a low of 154.40 yen from its earlier peak of 160.245. Banking sources revealed that Japanese banks were observed selling dollars to acquire yen. By 2127 GMT, the U.S. currency was trading at 156.27 yen, marking a decline of over 1% since late Friday.
On Monday, The Wall Street Journal reported that Japanese financial authorities had intervened in the market, as per sources familiar with the situation.
Traders had been anticipating such action from Tokyo for weeks to support a currency that had depreciated by approximately 11% against the dollar this year, reaching 34-year lows. This decline persisted despite the central bank’s recent departure from negative interest rates.
Trading activity in Asia on Monday was subdued compared to usual, attributed to Japan’s Golden Week holiday.
The fluctuations on Monday followed the Bank of Japan’s (BOJ) decision last week to maintain its guidance on government bond purchases. This move dashed the expectations of some traders who had hoped for a reduction in purchases to curb the yen’s downward trend.
“Last night’s volatility follows the central bank’s decision last week to keep asset purchase volumes unchanged, maintaining significant disparities in interest rates and limiting policymakers’ options to counteract the currency’s decline,” explained Karl Schamotta, chief market strategist at Corpay.
To get today’s great Deal click here!
He noted that the breach above 160 clearly constituted the type of “disorderly” movement that the Ministry of Finance has previously demonstrated a willingness to address. “Algorithm-driven selling may have persisted amid the thinly-traded holiday conditions.”
Currency traders have been betting on Japanese interest rates remaining low for the foreseeable future, in contrast to the relatively higher rates in the United States. Japanese government bonds offer yields significantly lower than U.S. Treasuries and other foreign sovereign bonds, prompting a continuous outflow of Japanese capital overseas and exerting downward pressure on the yen.
“Given the interest rate differential between the Bank of Japan and the Federal Reserve, coupled with the BOJ’s apparent reluctance to take action, it’s challenging to generate momentum for the Japanese yen to appreciate,” explained Joseph Trevisani, senior analyst at FX Street in New York.
Japan’s chief currency diplomat, Masato Kanda, declined to comment on whether authorities had intervened but characterized the current developments in the currency market as “speculative, rapid, and abnormal,” warranting attention.
The Ministry of Finance (MOF) of Japan was unavailable for comment immediately, as markets in the country were closed for a holiday on Monday.
To get today’s great Deal click here!
“If today’s movement indeed reflects intervention by the authorities, it’s unlikely to be a one-time occurrence,” remarked Nicholas Chia, Asia macro strategist at Standard Chartered Bank in Singapore. “We can expect further action from the MOF if the dollar/yen pair revisits the 160 level. In essence, the 160-level represents a pain threshold or a new line in the sand for the authorities.”
A depreciating yen benefits Japanese exporters, but poses challenges for policymakers by driving up import expenses, contributing to inflationary pressures, and putting pressure on households.
BOJ Governor Kazuo Ueda stated during a press conference following a meeting last week that monetary policy does not specifically aim to influence currency rates. However, he acknowledged that exchange-rate volatility could have a significant economic impact.
While the Bank of Japan (BOJ) is not tasked with directly managing the currency, a weakened yen complicates its goal of achieving sustainable inflation. Rapid rate hikes are also off the table, as they risk destabilizing Japan’s heavily indebted government and economy.
The suspected intervention occurred just days before the Federal Reserve’s policy review on May 1. Expectations for rate cuts by the Fed have been delayed throughout the year due to persistent U.S. inflation. Policymakers, led by Fed Chair Jerome Powell, have stressed that any rate adjustments will hinge on incoming data.
This suggests that interventions may only provide temporary support for the yen if accompanied by a shift in central bank policy. “A combined effort by the BOJ to show urgency in policy normalization and the Ministry of Finance (MOF) to conduct FX intervention may prove more effective than the MOF acting alone,” suggested Christopher Wong, a currency strategist at OCBC in Singapore.
To get today’s great Deal click here!
In 2022, Japan intervened in the currency market three times, selling the dollar to buy yen, notably in September and October as the yen approached 152 to the dollar, marking a 32-year low at the time. It’s estimated that Tokyo spent around $60 billion defending the currency during those episodes.
Earlier this month, the United States, Japan, and South Korea agreed to “consult closely” on currency markets, signaling a rare warning. Tokyo has also intensified its rhetoric against excessive yen movements.
On Monday, both the Federal Reserve Bank of New York and the European Central Bank declined to comment on the currency market activity. The yen has also reached multi-year lows against other major currencies, including the euro, the Australian dollar, and the Chinese yuan.
Despite interventions, some market participants anticipate the yen’s weakness to persist in the near term. “Intervention typically reverses price action for a short period, buying officials some time,” analysts at TD Securities noted. “However, it cannot offset global macroeconomic forces. Meaningful changes in the yen’s trajectory would require lower U.S. rates or a more hawkish stance from the BOJ.”
English