What’s Happening With the Yen?

After last week’s triple “intervention” by authorities, the USDJPY keeps trending back up. Does that mean more intervention will happen? Why isn’t the currency getting stronger now that it appears the BOJ bank of Japan has drawn a line in the sand? There are a lot of reasonable questions about the performance of the yen over the past week.

We have to talk about “intervention” in quotes, because so far there is no official confirmation that the Ministry of Finance did order the BOJ to support the yen. That’s different from the last time, back in September of 2022, when the Ministry confirmed it almost immediately. But, the Ministry said that ast time was different, because it was the first time in over two decades that an intervention was conducted.

There Are a Lot More Differences

That’s not the only difference. After the last intervention in 2022, the yen trended higher for several months. Though part of that might not be due to the intervention, but market expectations as that was the final months of former BOJ bank of Japan Governor Haruhiko Kuroda’s term, and he was noted as an ultra-dove. There was rampant speculation that a new BOJ governor would come in with a much more hawkish bent, and start raising rates. That would provide some support for the yen.

Well, since then, Kazuo Ueda has become Governor of the BOJ, rates were brought out of negative and YCC has been done away with. And the yen still got weaker. Meaning that the BOJ could be running out of ammunition in terms of expectations, since the things that drove the yen higher last time have already been done.

The Weakening Stance

With the BOJ bank of Japan having kept rates low for so long, it would be a serious shock to the system if rates started to rise too fast. The Fed’s strong campaign to raise rates led to the collapse of several regional banks in the US last year. That’s in an economy that was used to having regularly fluctuating interest rates. The theory is that it would be an even bigger problem for Japanese banks if the BOJ were to act too aggressively.

Which means that there is little chance of a strong rise in rates that would significantly cut the interest gap between the yen and other major currencies that is fueling yen carry trade. It’s that “speculative” carry trade that is seen as weakening the yen so much and so quickly. With that last major tool off the table for the BOJ, the only thing left is intervention.

Time to Be Cautious

The three interventions are estimated to have cost Japan around $60B of its reserves, and it does not have endless reserves to spend on propping up its currency. The US theoretically has unlimited reserves and would be the “big gun” in terms of intervention to stabilize the yen. But Treasury Secretary Janet Yellen urged caution over intervention, suggesting that the Americans aren’t as interested in supporting the Japanese currency just yet.

In the end, Japan does like to have a weaker currency – just not becoming too weak too fast. Which is why authorities might not be particularly worried that the exchange rate isn’t switching to the other direction, and might prefer to take smaller actions to simply slow its fall. And that could be what carry traders are betting on, and why they aren’t pulling out of the market and giving support to the yen.

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