Analysis: Japan is chasing the intervention on the yen

Analysis: Japan is chasing the intervention on the yen

Japanese yen banknotes are seen in this illustration photo taken September 22, 2022. REUTERS/Florence Lo/Illustration

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SINGAPORE, Sept 23 (Reuters) – As the Bank of Japan enters the foreign exchange markets for the first time in decades to defend a battered yen, it faces many obstacles, chiefly its own stubborn commitment to monetary parameters ultra-flexible.

Thursday’s sudden eruption of the yen-buying intervention by the Japanese authorities – the first since 1998 – caused a significant movement of 6 yen between 140 and 146 in the dollar-yen exchange rate.

By the end of the busy day, which also saw markets digest a rate hike from the Federal Reserve and a commitment from the BOJ to keep rates negative, investors were no less bearish on the yen, which is depreciated by nearly 20% so far this year.

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“It’s quite symbolic in the sense that it’s the first time since 1998, but I don’t think it will be effective in reversing the yen’s trend,” said Vincent Tsui, Asia analyst at Gavekal Research in Hong Kong.

Given a history of deflation, the Bank of Japan’s desire to keep rates low until it sees stable and healthy price increases has made it a lone dove this year, while other The world’s major central banks are aggressively raising rates to contain soaring inflation. US policy rates are now 3 percentage points higher than those in Japan.

But the BOJ’s policy is at odds even at home, with a government worried about the impact of a weak yen on energy prices and consumer sentiment, and its risk-loving households with reserves of idle cash worth more than 1 trillion yen ($7.04 trillion). to search for higher-yielding assets abroad read more .

Governor Haruhiko Kuroda has made it clear that the policy will not change, and even the yen that the BOJ is buying as part of the intervention will be replaced.

As long as the BOJ has a yield-curve control policy, any monetary tightening caused by the yen-buying intervention will be neutralized, he said on Thursday, referring to regular weekly yen-buying operations. BOJ bonds to cap yields.

Brendan McKenna, international economist and currency strategist at Wells Fargo Securities, points out that even though the intervention took place, US yields rose about 6 basis points that day and Japanese yields fell, leading to a bigger gap in interest rates and giving the markets even more reason. to empty the yen.

“The fact that the intervention was unilateral and that it happened on the same day of a dovish meeting of the Bank of Japan speaks to the very great internal contradictions,” said the head of the Deutsche’s foreign exchange strategy. Bank, George Saravelos, in a note.


Saravelos says such an intervention, while Japan sticks to a policy of yield curve control, will cause the central bank to lose credibility and could help reduce some speculative yen positions without really changing the tendency.

“Intervention to strengthen the currency is in direct contradiction to the policy of the Bank of Japan,” Deutsche said, and that it was simply not credible for a central bank to depreciate its currency via extreme amounts of quantitative easing as authorities sought a stronger currency at the same time.

Citi analysts noted how the 1997-98 yen buying intervention failed to reverse its depreciation.

Unlike today, yields were then very far apart but did not move against the yen. while the boj intervened heavily between april and june 1998, the yen did not bottom out until september.

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However, this is the beginning. UBS strategist James Malcolm believes the intervention could be a concerted months-long campaign, given the extent of speculative positioning against the yen and Japan’s nearly $1.3 trillion war chest. in foreign exchange reserves.

He points to Japan’s lending to non-residents which hit a record high of $315 billion in the twelve months to July, three-quarters of which was short-term, most accrued since March.

“The success of intervention is not measured in days but rather in decades,” Malcolm wrote, pointing out that Japanese authorities last purchased about $150 billion at nearly 75 yen in 2011. Part of this sum is currently being spent, he believes.

(This story has been reclassified to paraphrase comments in paragraph 8)

($1 = 142.0800 yen)

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Additional reporting by Bansari Mayur Kamdar in Bangalore, Leika Kihara in Tokyo, Tom Westbrook and Rae Wee in Singapore; Editing by Kim Coghill

Our standards: The Thomson Reuters Trust Principles.

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