Japan intervenes in the foreign exchange market to stop the yen’s decline after the Bank of Japan kept rates very low

  • Bank of Japan maintains very low rates, pessimistic policy guidance
  • A Japanese foreign exchange diplomat said he had taken “decisive” action.
  • Confirmation of intervention pushes the dollar to slide more than 2%
  • Analysts doubt Tokyo’s ability to continue supporting the yen
  • Bank of Canada says it didn’t help the Bank of Japan

TOKYO (Reuters) – Japan intervened in the foreign exchange market on Thursday to buy the yen for the first time since 1998 in a bid to prop up a battered currency after the Bank of Japan suspended ultra-low interest rates.

The move, which occurred in late Asian trading hours, saw the dollar fall more than 2% to around 140.3 yen. There were no subsequent signs of further BoJ intervention or assistance from other central banks, and the dollar was last down about 1.25% at 142.25 yen at 12:07 PM ET / 1607 GMT..

It had earlier traded more than 1% higher on the back of the Bank of Japan’s decision to stick to its ultra-loose policy stance, defying the global tide of monetary tightening by central banks battling soaring inflation.

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“We have taken decisive action,” Deputy Finance Minister for International Affairs Masato Kanda told reporters, responding in the affirmative when asked if that meant intervening.

However, analysts questioned whether the move would halt the yen’s prolonged decline. The currency has fallen about 20% this year, dropping to its lowest level in 24 years, largely as violent increases in US interest rates pushed the dollar higher.

“The market was expecting some intervention at some point, given the increased verbal interventions we’ve been hearing over the past few weeks,” said Stuart Cole, chief macro economist at Equiti Capital in London.

“But currency intervention is seldom successful and I expect today’s move to provide only a temporary respite (for the yen).”

Finance Minister Shunichi Suzuki declined to reveal how much the authorities spent on buying the yen and whether other countries had agreed to the move.

The US Treasury on Thursday acknowledged the Bank of Japan’s move but stopped short of endorsing the intervention.

Two months ago, US Treasury Secretary Janet Yellen said about the depreciation of the yen that Washington remains convinced that currency intervention is only justified in “rare and exceptional circumstances”, and that the market should set exchange rates for the G7 countries. Read more

Kanda, who joined Suzuki at the press conference, said Japan had “good contacts” with the United States, but declined to say whether Washington had agreed to Tokyo’s intervention.

As a protocol, currency intervention requires informal approval by Japan’s G7 counterparts, particularly the United States, if it is to be conducted against the dollar/yen.

The Bank of Canada said Thursday that it has not been involved in any currency market intervention. Read more

Confirmation of the intervention came hours after the Bank of Japan decided to keep interest rates near zero to support the country’s fragile economic recovery, a position many analysts believe is increasingly untenable given the global shift to higher borrowing costs.

Bank of Japan Governor Haruhiko Kuroda told reporters that the central bank may hold off on raising interest rates or change its pessimistic policy direction for years.

After the monetary policy decision, Kuroda said, “There is absolutely no change in our stance of maintaining easy monetary policy for now. We will not raise interest rates for some time.”

The BOJ’s decision came after the US Federal Reserve introduced its third consecutive interest rate increase of 75 basis points on Wednesday and signaled more massive hikes ahead, underlining its determination to not let up in its fight against inflation and give more support to the dollar. Read more

Japan also stood alone among the major economies in keeping short-term interest rates in negative territory after the Swiss National Bank on Thursday raised its policy rate by 75 basis points, ending years of negative rates aimed at taming the appreciation of its currency. Read more

SNB President Thomas Jordan said at a press briefing that his bank had not been involved in any coordinated actions to support the yen.

Another resort weapon

With the Bank of Japan ruling out a near-term interest rate hike, currency intervention has been the most powerful weapon – and last resort – left by Japan to stem sharp declines in the yen that have been raising import costs and threatening to hurt consumption.

Yen Interventions 1990-2020

“The first intervention in the Japanese currency in nearly a quarter century is an important step, but it is ultimately doomed to fail to defend the yen,” said Ben Lidler, global markets analyst at eToro in London.

“As long as the Fed remains hawkish, any intervention in the yen is likely to slow rather than stop the yen’s decline.”

Yen-buying intervention was very rare. The last time Japan intervened to prop up its currency was in 1998, when the Asian financial crisis caused a sell-off of the yen and a rapid influx of capital from the region. Before that, Tokyo intervened to counter the depreciation of the yen in 1991-92.

Intervening by buying the yen is more difficult than selling it.

In the yen selling intervention, Japan can continue to print yen to sell in the market. But to buy, you need to tap into its $1.33 trillion foreign reserves, which, while abundant, could quickly dwindle if huge sums are needed to influence prices.

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(Reporting by Laika Kihara). Additional reporting by Andrea Shalal in Washington, Julie Gordon in Ottawa, Gertrude Chavez and Alden Bentley in New York, Tetsushi Kajimoto, Kantaro Komiya, Daniel Lucink, Kaori Kaneko and Takaya Yamaguchi in Tokyo, Bansari Mayor Kamdar in Bangalore; Editing by Richard Boleyn, Sam Holmes and Kirsten Donovan

Our criteria: Thomson Reuters Trust Principles.

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