Japan intervenes in the foreign exchange market to stem the fall of the yen after the BOJ keeps rates extremely low

Japan intervenes in the foreign exchange market to stem the fall of the yen after the BOJ keeps rates extremely low

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  • BOJ maintains ultra-low rates and dovish policy guidance
  • Japanese diplomat FX said it had taken ‘decisive’ action
  • Confirmation of the intervention causes the dollar to fall by more than 2%
  • Analysts doubt Tokyo can continue to support the yen

TOKYO, Sept 22 (Reuters) – Japan intervened in the foreign exchange market on Thursday to buy the yen for the first time since 1998, in a bid to shore up the struggling currency after the Bank of Japan got bogged down with rates extremely low interest.

The move sent the dollar down more than 2% to around 141.15 yen, after trading more than 1% earlier following the BOJ’s decision to stick to its very loose policy, thwarting a global wave of monetary tightening by central banks struggling to rein in runaway inflation.

“We have taken decisive action (on the foreign exchange market),” Deputy Finance Minister for International Affairs Masato Kanda told reporters, answering yes when asked if that meant a intervention.

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Analysts, however, doubted the move would stop the yen’s prolonged decline for long. The currency has depreciated nearly 20% this year, falling to its lowest level in 24 years, largely because aggressive hikes in US interest rates are pushing the dollar higher.

“The market was expecting intervention at some point, given the increase in verbal intervention we’ve heard in recent weeks,” said Stuart Cole, chief macroeconomist at Equiti Capital in London.

“But currency interventions are rarely successful and I expect today’s decision to provide only a temporary reprieve (for the yen).”

Confirmation of the intervention came hours after the BOJ decided to keep interest rates low to support the country’s fragile economic recovery.

BOJ Governor Haruhiko Kuroda told reporters that the central bank could delay raising rates or change its dovish policy guidance for years.

“There is absolutely no change in our position to maintain an accommodative monetary policy at this time. We will not be raising interest rates for some time,” Kuroda said after the policy decision.

The BOJ’s decision came after the US Federal Reserve announced its third straight 75 basis point rate hike on Wednesday and signaled more hikes to come, underscoring its determination not to let up on its fight against inflation and to give new impetus to the dollar. Read more

With the BOJ having ruled out a short-term rate hike, monetary intervention was the most potent weapon – and of last resort – available to Japan to stop the sharp falls in the yen that were driving up import costs and threatening to harm consumption.

“The first Japanese currency intervention in nearly a quarter of a century is an important but ultimately doomed step in defending the yen,” said Ben Laidler, global market strategist at Etoro in London.

“As long as the Fed remains on a hawkish stance and raises rates, any intervention in the yen will only slow, not arrest, the yen’s slide.”

Interventions to buy yen were very rare. The last time Japan stepped in to support its currency was in 1998, when the Asian financial crisis triggered a massive sell-off in yen and a rapid outflow of capital from the region. Before that, Tokyo intervened to counter the fall of the yen in 1991-1992.

Intervention to buy yen is also considered more difficult than selling yen.

In a yen sell intervention, Japan may continue to print yen to sell in the market. But for a yen-buying intervention, Japan needs to tap into its $1.33 trillion in foreign exchange reserves which, while plentiful, could quickly dwindle if huge sums are needed to influence rates.

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Reporting by Leica Kihara; Additional reporting by Tetsushi Kajimoto, Kantaro Komiya, Daniel Leussink, Kaori Kaneko and Takaya Yamaguchi; Editing by Richard Pullin, Sam Holmes and Kim Coghill

Our standards: The Thomson Reuters Trust Principles.

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