Japan Acts on Yen Again to Keep Traders on Their Toes
Tokyo has likely pumped around US$64 billion into foreign-currency markets, moving twice in a holiday-shortened period, and at the time of a Fed decision.
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Dramatic moves in the exchange rate indicate that the Japanese government looks to have stepped into the foreign-exchange markets yet again to protect the yen, the world’s worst-performing major currency this year.
While it is Japan’s finance ministry that is buying the yen, there’s further evidence of a second intervention this week in the form of the accounts from the central Bank of Japan (BOJ).
Japanese authorities have timed their intervention for maximum disruption. It’s unusual for them to act around the time of a U.S. Federal Reserve rates decision, but that’s exactly what happened.
The yen, which already lurched on Monday, ended the U.S. trading day on Wednesday with a sudden rally from ¥157.59 to the U.S. dollar to ¥153 and change. That was a double-time 2.7% strengthening.
The sudden change came in the wee hours of the morning on Thursday in Asia. What’s more, Japanese markets were closed on Monday for Showa Day, in honor of the emperor’s birthday, and will be closed again on Friday for Constitution Day.
Meanwhile, most other Asian markets (except Japan!) were closed on Wednesday for Labor Day. Mainland China celebrates a Golden Week surrounding that holiday, while many Japanese traders also make the most of this shortened week to take time off.
The bottom line: Japanese authorities want to get the attention of foreign-exchange traders, and ram home the message that current yen weakness is too severe for them to ignore.
The BOJ published its accounts that act of evidence of intervention. Bloomberg has run the numbers and calculates that the ¥4.36 trillion (US$28.1 billion) decline in the current account, which is much larger than forecast by brokers, suggests that the currency authorities spent around ¥3.5 trillion (US$22.6 billion) to prop up the yen. There was a heavy volume of yen-futures trading late in the U.S. day.
The action came as currency traders would have been digesting the U.S. Fed’s latest decision. The Fed left rates unchanged in its policy decision, leaving borrowing costs at 5.33%. But in a world of “higher for longer,” markets scrutinize the language surrounding any move, even if it’s to stay still.
Fed Chair Jerome Powell noted that recent readings on inflation “have come in above expectations.” So while he said it’s likely the next move would be to cut rates, it will take longer for the U.S. central bank to be “confident” that the pace of price hikes is really coming down “sufficiently and sustainably.”
More of the same, in other words. The issue for us in Asia is that U.S. rates are well above those in most Asian nations, with China currently dealing with the prospect of deflation, and Japan having only recently beaten back that demon, which devastates an economy.
Japan’s second intervention came after Tokyo likely spent around ¥5.5 trillion (US$35.5 billion) on Monday to ward off currency speculators, a move I discussed in my last column, indicating Japan is set for an expensive and probably futile battle. The yen rallied 3.6% in a few hours. Such a daily spend would approach the record ¥5.6 trillion confirmed spent at the last incidence, in October 2022.
Japan’s top currency official, Masato Kanda, again acted coy about whether Tokyo was actually stepping into currency markets. It’s clear the authorities would rather keep traders temporarily in the dark, although there will be official figures on the last day of the month that will confirm the scope of intervention.
Even after this week’s government-orchestrated defense, the Japanese currency is down 9.6% in 2024. It briefly moved above ¥160 to the U.S. dollar, a level not seen since April 1990, during the tumult as Japan’s asset-bubble burst.
The BOJ also opted not to change rates at its April meeting. That leaves them just above 0.0%, after seven years of pushing them into negative territory.
The finance ministers of the United States, Japan and South Korea warned in mid-April that the sharp depreciation of the yen and the Korean won is a “serious” concern. The strong U.S. dollar is provoking debate among Asian central bankers as to how to handle domestic rates, which by rights should be falling, without causing increased currency declines.
Indonesia’s central bank last week took the surprise step to hike interest rates in the hopes of making the rupiah more attractive as a holding. Bank Indonesia increased the cash rate by 25 basis points to 6.25%. The central bank forecast that the Indonesian currency should stay around 16,200 to the U.S. dollar and strengthen later this year.
