The USDJPY has moved towards the 160 level once again, which has triggered BOJ intervention in the past. The question is whether Japanese policymakers will try to force the currency down once again, and how willing the market is to test the limit. Officially, Japan doesn’t have an intervention policy or a specific level it’s trying to defend, which adds some ambiguity to the situation.
Notably, the rhetoric from Japanese authorities has been less urgent than in past occasions when the currency has risen to this level. Finance Minister Satsuki Katayama made an interesting remark early on Tuesday, saying that the Ministry has established rhetoric and won’t change its messaging. This could provide clues about what the government is trying to achieve through its interventions in the currency market.
Why Intervention Might Be Delayed
Japanese authorities might be slower to intervene this time around, given a change in government priorities. It’s important to remember that it’s the BOJ that actually intervenes, but it does so on behalf of the Ministry of Finance. To prop up the yen, the BOJ sells dollars from the government’s reserves. Eventually, the reserves can run out, making it physically impossible for the government to intervene.
This is one of the reasons intervention becomes less effective over time: it depletes the government’s reserves and doesn’t change the underlying market dynamics. The main purpose of an intervention is to cause a sudden move in the market that will drive out carry traders. The USDJPY carry trade relies on the Yen currency weakening to take advantage of the interest rate differential. If the Yen currency strengthens, carry traders lose money. The threat of intervention helps prevent carry-trade (or “speculative”) moves, but won’t change the currency’s fundamental value driven by diverging interest rates.
The Government Actually Wants a Weaker Yen
Generally, a weaker currency is better for economic growth because it makes exports more competitive. That’s particularly relevant for Japan, as a country that primarily exports. The flip side is that a weaker currency drives up inflation. So, the government does not want a rapid decline in the currency, and has repeatedly stated that. Numerous Japanese policymakers have said that the main issue is that the currency is weakening too fast.
Japan’s partners also do not want the currency to weaken too much and want to discourage carry trading. Those include the US, which doesn’t want to see the dollar get too strong, as it would hurt its own exports. Therefore, the US and Japan have a vested interest in keeping the yen from falling too fast. This is important because while the Japanese government has limited reserves to intervene, the Federal Reserve has unlimited dollars at its disposal. That would be the ultimate form of intervention. But it’s often preceded by a signal to the markets: a “rate check”. That’s when the Federal Reserve contacts a bank and asks about the exchange rate. This simple procedure can move markets by several hundred pips as they react to the threat of intervention from the biggest player. That has not happened yet.
Taking that into consideration, intervention to support the yen could be delayed as Japanese officials want the currency to gradually weaken. So the limit for intervention could rise over time. And if it gets out of hand, they still have the biggest weapon still in reserve.
