Japanese authorities are facing renewed pressure to combat sharp declines in the yen, as traders drive down the currency on expectations the interest rate differentials between Japan and the United States will remain wide.
Below are details on how yen-buying intervention works:
LAST CONFIRMED YEN-BUYING INTERVENTION?
Tokyo spent 9.8 trillion yen ($61 billion) intervening in the foreign exchange market in end-April and early May, after the Japanese currency hit a 34-year low of 160.245 per dollar on April 29.
The move helped keep the yen from falling below the psychologically important 160 mark until Wednesday, when it sank to a nearly 38-year low of 160.82 as traders renewed their focus on the U.S.-Japan interest rate gap.
WHY STEP IN?
Yen-buying intervention had been rare. More often, the Ministry of Finance has sold yen to prevent its rise from hurting the export-reliant economy by making Japanese goods less competitive overseas.
But yen weakness is now seen as problematic, with Japanese firms having shifted production overseas and the economy heavily reliant on imports for goods ranging from fuel and raw materials to machinery parts.
WHAT HAPPENS FIRST?
When Japanese authorities escalate their verbal warnings to say they “stand ready to act decisively” against speculative moves, that is a sign intervention may be imminent.
Rate checking by the Bank of Japan – when central bank officials call dealers and ask for buying or selling rates for the yen – is seen by traders as a possible precursor to intervention.
WHAT HAPPENED SO FAR?
Japan’s top currency diplomat Masato Kanda said on Wednesday authorities were “seriously concerned and on high alert” about the yen’s decline, which he described as driven by speculators.
He also said Tokyo was “preparing to act” against excessive volatility, signaling readiness for another intervention.
The jawboning has failed to reverse the weak-yen tide with the Japanese currency hovering at 160.68 to the dollar in Asia on Thursday. The yen has also fallen sharply against other currencies such as the euro.
CHANCE OF INTERVENTION?
Authorities say they look at the speed of yen falls, rather than levels, and whether the moves are driven by speculators, to determine whether to step into the currency market.
The yen’s fast-pitch decline below the key 160-to-the-dollar level is heightening market alarm over the chance of imminent yen-buying intervention.
“At this point, authorities are probably starting to worry not just about the speed but the level,” Masafumi Yamamoto, chief currency strategist at Mizuho Securities, said in a research note. “Unless they intervene, there’s a risk the yen will slide toward 162.”
WHAT’S THE TRIGGER?
The decision is highly political. When public anger over the weak yen and a subsequent rise in the cost of living is high, that puts pressure on the administration to respond. This was the case when Tokyo intervened in 2022.
Prime Minister Fumio Kishida may feel the need to prevent further yen falls from pushing up the cost of living with his approval ratings faltering ahead of a ruling party leadership race in September.
But the decision would not be easy. Intervention is costly and could easily fail, given that even a large burst of yen buying would pale next to the $7.5 trillion that change hands daily in the foreign exchange market.
HOW WOULD IT WORK?
When Japan intervenes to stem yen rises, the Ministry of Finance issues short-term bills, raising yen it then sells to weaken the Japanese currency.
To support the yen, however, the authorities must tap Japan’s foreign reserves for dollars to sell for yen.
In either case, the finance minister issues the order to intervene and the BOJ executes the order as the ministry’s agent.
CHALLENGES?
Japanese authorities consider it important to seek the support of Group of Seven (G7) partners, notably the United States, if intervention involves the dollar.
Finance leaders of the G7 advanced nations last month reaffirmed their commitment to warn against excessively volatile currency moves, language Japan sees as a green light to intervene in the market.
Earlier this month, the U.S. Treasury added Japan to a foreign exchange “monitoring list” in its semi-annual currency report.
While the step did not take into account Tokyo’s latest intervention, it said “Treasury’s expectation is that in large, freely traded exchange markets, intervention should be reserved only for very exceptional circumstances with appropriate prior consultations.”
There is no guarantee intervention will effectively shift the weak-yen tide, which is driven largely by expectations of prolonged low interest rates in Japan.
The BOJ has been dropping signals its quantitative tightening (QT) plan in July could be bigger than markets think, and may even be accompanied by a rate hike.
But the hawkish hints have failed to give the yen much boost, as any increase in the BOJ’s current near-zero short-term policy target will still keep Japan’s borrowing costs very low.
