Forex
Explainer-What would Japanese intervention to boost a weak yen look like?
By Leika Kihara
TOKYO (Reuters) -Japanese authorities are facing renewed pressure to combat a sustained depreciation in the yen, as traders drive down the currency on expectations that any further interest rate hikes by the central bank will be slow in forthcoming.
Below are details on how yen-buying intervention works:
LAST CONFIRMED YEN-BUYING INTERVENTION?
Japan bought yen in September 2022, its first foray in the market to boost its currency since 1998, after a Bank of Japan (BOJ) decision to maintain its ultra-loose monetary policy drove the yen as low as 145 per dollar. It intervened again in October after the yen plunged to a 32-year low of 151.94.
WHY STEP IN?
Yen-buying intervention is rare. Far more often the Ministry of Finance has sold yen to prevent its rise from hurting the export-reliant economy by making Japanese goods less competitive overseas.
But yen weakness is now seen as problematic, with Japanese firms having shifted production overseas and the economy heavily reliant on imports for goods ranging from fuel and raw materials to machinery parts.
WHAT HAPPENS FIRST?
When Japanese authorities escalate their verbal warnings to say they “stand ready to act decisively” against speculative moves, that is a sign intervention may be imminent.
Rate checking by the BOJ – when central bank officials call dealers and ask for buying or selling rates for the yen – is seen by traders as a possible precursor to intervention.
WHAT HAPPENED SO FAR?
Finance Minister Shunichi Suzuki told reporters on March 27 that authorities could take “decisive steps” against yen weakness – language he hasn’t used since the 2022 intervention.
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Hours later, Japanese authorities held an emergency meeting to discuss the weak yen. The meeting is usually held as a symbolic gesture to markets that authorities are concerned about rapid currency moves.
After the warnings failed to arrest the yen’s fall, South Korea and Japan won acknowledgement from the United States over their “serious concerns” about their currencies’ declines in a trilateral meeting held in Washington last week.
The market impact of the agreement did not last long. The dollar continued its ascent and notched a 34-year high of 155.74 yen on Thursday, driving past the 155 level seen as authorities’ line in the sand for intervention.
NEXT LINE IN THE SAND?
Authorities say they look at the speed of yen falls, rather than levels, and whether the moves are driven by speculators, to determine whether to step into the currency market.
While the dollar has moved above the psychologically important 155 level, the recent rise has been gradual and driven mostly by U.S.-Japanese interest rate differentials. That may make it hard for Japan to argue that recent yen falls are out of line with fundamentals and warrant intervention.
Some market players bet Japanese authorities’ next line in the sand could be 160. Ruling party executive Takao Ochi told Reuters the yen’s slide towards 160 or 170 to the dollar could prod policymakers to act.
WHAT’S THE TRIGGER?
The decision is highly political. When public anger over the weak yen and a subsequent rise in the cost of living is high, that puts pressure on the administration to respond. This was the case when Tokyo intervened in 2022.
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Prime Minister Fumio Kishida may feel the need to prevent further yen falls from pushing up the cost of living with his approval ratings faltering ahead of a ruling party leadership race in September.
But the decision would not be easy. Intervention is costly and could easily fail, given that even a large burst of yen buying would pale next to the $7.5 trillion that change hands daily in the foreign exchange market.
HOW WOULD IT WORK?
When Japan intervenes to stem yen rises, the Ministry of Finance issues short-term bills, raising yen it then sells to weaken the Japanese currency.
To support the yen, however, the authorities must tap Japan’s foreign reserves for dollars to sell for yen.
In either case, the finance minister issues the order to intervene and the BOJ executes the order as the ministry’s agent.
CHALLENGES?
Japanese authorities consider it important to seek the support of Group of Seven partners, notably the United States if the intervention involves the dollar.
Washington gave tacit approval when Japan intervened in 2022, reflecting recent close bilateral relations.
Finance Minister Suzuki said last week’s meeting with his U.S. and South Korean counterparts laid the groundwork to act against excessive yen moves, a sign Tokyo saw the meeting as informal consent by Washington to intervene as needed.
A looming U.S. presidential election may complicate Japan’s decision on whether and when to intervene.
In a social media post on Tuesday, Republican presidential candidate Donald Trump decried the yen’s historic slide against the dollar, calling it a “total disaster” for the United States.
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There is no guarantee intervention will effectively shift the weak-yen tide, which is driven largely by expectations of prolonged low interest rates in Japan. BOJ Governor Kazuo Ueda has dropped hints of another rate hike but stressed that the bank will tread cautiously given Japan’s fragile economy.
Investing.com – The U.S. dollar edged higher in European trade Friday, but was on track for a hefty weekly fall after cooling inflation and weak retail sales brought Federal Reserve rate cuts back into focus.
At 04:10 ET (08:10 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher at 104.580, marginally above a five-week low just below 104 seen earlier this week.
Dollar steadies after hawkish Fed speak
The dollar has recovered to a degree as several Fed officials, specifically members of the bank’s rate-setting committee, said that they needed much more confidence that inflation was coming down, beyond some easing inflation in April.
“I now believe that it will take longer to reach our 2% goal than I previously thought,” St. Louis Federal Reserve president Loretta Mester said on Thursday, adding that further monitoring of incoming data will be needed.
Federal Reserve Bank of New York President John Williams agreed with this view.
“I don’t see any indicators now telling me … there’s a reason to change the stance of monetary policy now, and I don’t expect that, I don’t expect to get that greater confidence that we need to see on inflation progress towards a 2% goal in the very near term,” Williams said.
However, the dollar is still on course for a weekly loss of around 0.7% after the milder than expected U.S. data raised expectations the will deliver two interest rate cuts this year, probably starting in September.
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U.S. were also flat in April and softer-than-expected, and manufacturing output unexpectedly fell.
“Our view for the near term remains that we could see a further stabilisation in USD crosses as markets await the next key data input: April core PCE on 31 May,” said analysts at ING, in a note.
Euro slips ahead of CPI release
In Europe, traded 0.1% lower to 1.0860, having traded as high as 1.0895 in the wake of U.S. inflation release, but the single currency is still up around 0.9% on the dollar this week.
The final reading of the is due later in the session, and is expected to show inflation rose by 2.4% on an annual basis in April.
The is widely expected to cut interest rates in June, but traders remain unsure of how many more cuts, if any, the central bank will agree to over the course of the rest of the year.
Traders have priced in 70 basis points of ECB cuts this year – a lot more than the just under 50 bps of easing priced in for the Fed.
fell 0.1% to 1.2658, but is still on track for gains of around 1% this week.
The Bank of England is also expected to cut rates from a 16-year high this summer, but volatility is likely to be limited ahead of the release of key U.K. inflation figures next week.
Yen slips after weak Japanese GDP data
In Asia, rose 0.3% to 155.87, close to breaking above 156, after weaker-than-expected Japanese data for the first quarter.
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traded 0.1% higher at 7.2209, moving back to six-month highs above 7.22 after data earlier Friday showed grew more than expected in April, but growth in slowed sharply, while a decline in Chinese house prices accelerated last month.
Broker ING noted the potential downside risks for the British pound, noting the currency’s recent decline from its peak against the euro. The GBP’s sensitivity to the performance of US equities was highlighted as a contributing factor to its movement.
The firm also observed a decrease in volatility for the pair as the market anticipates the release of key Consumer Price Index (CPI) figures in the UK scheduled for next week.
ING’s UK economist suggests that there may be a dovish tilt in expectations for the Bank of England’s (BoE) monetary policy. The firm maintains a favorable outlook on the possibility of the EUR/GBP pair rising, as market participants might increase their wagers on a potential interest rate cut by the BoE in June.
The British financial markets were focused on a speech delivered by Catherine Mann of the BoE, who is regarded as the most hawkish member of the Monetary Policy Committee (MPC).
This event followed comments made by Megan Greene, who recently shared a cautiously optimistic perspective on inflation, mirroring sentiments expressed by BoE Governor Andrew Bailey at the last meeting.
ING’s commentary comes as investors and analysts closely watch the central bank’s moves, which could significantly influence currency valuations. The anticipation of UK CPI data and the BoE’s potential response are key factors in the firm’s analysis of the GBP’s trajectory.
This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
The US dollar’s recent downtrend halted, aligning with forecasts by financial institution ING. Analysts observed that US economic data has not provided sufficient momentum to drive a significantly weaker dollar at this time.
This comes after jobless claims dropped to 222,000 from a previous week’s increase to 232,000. The labor market had shown similar patterns in January, with claims peaking at 225,000 before falling back to the range of 200,000 to 210,000.
ING anticipates a potential stabilization in USD currency pairs as investors await the release of the April core Personal Consumption Expenditures (PCE) price index, scheduled for May 31. The firm suggests that cross-asset volatility could remain subdued in the coming weeks, which may boost the search for carry trades.
Consequently, they express a lack of optimism for a recovery in the Japanese yen, currently deemed the most attractive funding currency.
In related developments, China’s latest economic figures influenced market sentiment. The country reported a 6.7% year-on-year increase in April industrial production, surpassing the expected 5.5%.
However, retail sales underperformed, registering a 2.3% growth against a forecasted 3.7%. According to ING’s economist, the data reflects ongoing caution among households and the private sector in China.
The US economic calendar for today includes the Leading Index, which is anticipated to have remained at -0.3% in April. Additionally, Federal Reserve officials Chris Waller, Neel Kashkari, and Mary Daly are scheduled to speak. ING forecasts the (DXY) to trade within the 104-105 range in the near term.
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This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.
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