Yen’s Sharp Moves Against Dollar Ignite Speculation of Intervention
The yen’s dramatic fluctuations against the dollar this week have fueled speculation among traders of possible official intervention to stabilize the currency. However, new Bank of Japan (BOJ) data released on Wednesday suggests that such intervention did not occur. While the focus has been on intervention, experts argue that the larger issue at hand is the impact of rising U.S. bond yields and Japan’s persistently low interest rates, both of which are likely to keep the yen under pressure. Until Japan tightens its monetary policy, it will have to contend with an exchange rate influenced by Washington.
The yen experienced what one analyst described as a “flash crash” on Tuesday, dropping to a one-year low of 150.165 against the dollar within 10 minutes before rebounding to around 147. By Thursday morning, it had settled at 148.4. This rapid and volatile movement reminded traders of similar occurrences in September and October of 2022, when Japanese officials spent approximately $70 billion to support the currency.
Intervention in the yen is infrequent, and unlike last year, the finance ministry did not confirm any such action this time around. Additionally, the BOJ’s projection of a current account surplus of 10 billion yen ($67 million) aligns with estimates made by brokerage houses before the yen’s recent volatility. This further strengthens the case that the central bank likely did not utilize any of its $1.1 trillion foreign currency reserves to bolster the yen. Even if intervention did occur, it would not address the underlying long-term issues affecting the currency.
This year, the yen has depreciated by over 13% against the greenback due to the surge in U.S. bond yields. The market is anticipating that the Federal Reserve will need to maintain high interest rates, or possibly raise them further, to combat persistent inflation.
On the other hand, the BOJ has been teasing markets with hints of a potential end to its extremely loose monetary policy. However, it has yet to take decisive action, partly out of concern that tightening too soon could stifle fragile economic growth. In its most recent meeting, BOJ Governor Kazuo Ueda and colleagues opted to keep short-term rates at minus 0.1% and maintain a yield of around 0% for 10-year government bonds. This has resulted in a significant spread between 10-year U.S. and Japanese sovereign bonds, making the dollar much more appealing than the yen. Given Japan’s heavy reliance on imported goods, including energy and raw materials, a weaker currency increases costs for domestic firms and contributes to price hikes.
With core inflation consistently surpassing the BOJ’s 2% target for the past 17 months, Ueda may soon be compelled to raise interest rates. However, in the absence of domestic action, the best hope for Japanese producers and yen supporters is that an unexpectedly severe economic slowdown in the United States will prompt the Federal Reserve to cut rates in early 2023.
Japan has experienced many false starts in terms of tightening its policies. Until Tokyo regains control over its monetary levers, it will have to endure an exchange rate that is heavily influenced by U.S. economic shifts.
On October 3, the dollar climbed to 150.165 against the yen, surpassing the crucial 150 level for the first time in a year. The greenback then retreated to as low as 147.30, leading to speculation of intervention by Japanese monetary officials to support the currency. However, initial data from the BOJ’s current account, released on October 4, suggests that intervention likely did not take place. The central bank’s projection of a 10 billion yen ($67 million) surplus falls within the range of estimates made by brokerage houses before any intervention speculation arose.
A senior official from the Japanese Ministry of Finance declined to comment on whether Japan had indeed intervened in foreign exchange markets, when questioned by Reuters.
More detail via Reuters here… ( Image via Reuters )