When Will the BOJ Intervene?
The USDJPY rose dangerously close to the 150 level over the weekend, which has sparked renewed speculation that Japanese authorities will do something to prop up the yen. BOJ Governor Kazuo Ueda spoke on Monday but didn’t provide any guidance for what could happen with the currency. That only heightened expectations.
The level is key, because 150 was seen as the trigger for the BOJ to intervene last year. Subsequently, to the intervention, the yen regained strength. But through the course of the summer, it’s gotten weak again. Since the intervention could make the currency swing wildly, there is a lot of anticipation among traders.
There’s more to it than intervention
The thing is, simple intervention might not be enough to slow the currency in the long run. The BOJ only would intervene at the behest of the Ministry of Finance, and with Japan racking up the highest debt ratio in the world, there is limited buying power. The markets might sense that weakness, potentially trying to “break” the Japanese government in the way that George Soros “broke” the BOE and became world famous.
After all, it wasn’t the intervention last year that brought the USDJPY down. It was the looming expiry of former BOJ Governor Kuroda’s term, a widely noted currency dove. There was ample expectation that he would be replaced by a new governor who would bring the ultra-easing of the last decade to an end. Maybe that might eventually happen – Ueda is less than six months into his term. But the expectation of a shift to hawkishness hasn’t happened, and the currency has reverted back to where it was.
There might be more to go
One of the issues that analysts are now pointing to is that for the Japanese currency authorities, the level might not be so important as the pace. A slowly depreciating yen is helpful for the economy, and might be seen supporting trade. A quickly depreciating yen can cause inflation and balance of payment problems. Therefore, it’s quite possible that authorities might let the currency weaken further this time, calculating that the depreciation is going slower.
The recent weakness is a combination of the BOJ not changing outlook, and the Fed expecting more hiking than the market has foreseen. That might be seen as a momentary situation that could even out over the coming days, and thus not necessitate Japan bring out the “big guns”. But, if they were, there are a couple of options.
What could bring the USDJPY down
Since mere intervention is generally expected to not strengthen the yen in the long term, Japanese authorities can likely do two other things. The first is coordinated intervention. That is, reach an agreement between the BOJ and the Fed to buy yen and sell dollars. Since it would be a swap agreement between the two central banks, there is technically an unlimited amount of buying that they could do. This happened back in the 90’s and substantially supported the yen for an extended period of time.
The other option is for the BOJ to finally announce that ultra-easing is coming to an end. The bank has sort of telegraphed as much, but has put a far ahead timeline, with the first moves potentially in the first quarter of next year. Earlier this month, Ueda dropped some hints that ending easing sooner than expected was a possibility, and the yen got a solid boost. That might have been a trial balloon for when the BOJ does it for real.