The price movements in USD/JPY in the past two days have been rather interesting. It has a certain feel that Tokyo is intervening but they don’t seem to be going as hard as they did before during previous episodes. That considering the fact we’re seeing USD/JPY bounce back quite “easily” yesterday and then now as well today.
Reports are suggesting that the ministry of finance did call up the BOJ to act on their behalf in the market. However, it is also likely that Tokyo officials are wary that they would be wasting ammunition if they went in big but got nothing out of it in the end.
USD/JPY fell quite quickly from 157.00 earlier to 155.50 levels again before bouncing back up. The pair is now trading flat at 156.60 levels, erasing a significant chunk of the drop. So, what gives?
A bit of a check in from Tokyo?As mentioned before, every fundamental factor is working against the yen currency at the moment. It is taking a hit not just from the previous – and still existing – backdrop of the Takaichi trade running, but now also from more dire economic circumstances. That as the Middle East conflict has made things ever so difficult for the Japanese economy and also for the BOJ in terms of their plans to raise interest rates.
Knowing that, are Tokyo officials just stepping in with small pot shots at the market instead of delivering a big punch for now? It is possible but we’ll only know more until intervention data comes out in the weeks ahead.
As a reminder, Japan spent over $60 billion when they intervened in September to October 2022 to buy up the yen. In April to May 2024, they also spent just a little over $60 billion before rounding it off with around $36 billion in July 2024.
Now, everyone knows that Tokyo has one of the biggest war chests in terms of foreign currency reserves. They have a whopping $1.2 trillion to work with. However, it is important to note that not all of this is in liquid cash deposits. In fact, over 80% of that are in securities which primarily consist of US Treasuries among other foreign government bonds.
So, it is not to say that they have an “unlimited” tap to keep drinking from if they burn out their cash reserves. If that were to be the case, it’s a tricky situation for the ministry of finance. If it were to come to that, selling Treasuries may have the unintended effect of pushing US yields higher and that is an indirect tailwind for the dollar instead. So, that sort of achieves the opposite effect of what Tokyo wants; that is for a lower USD/JPY.
Of course, it’s not as simple as that. However, all of this is part and parcel to the equation and it all adds up to how markets react at the end of the day. As such, that is something I reckon Tokyo officials will want to avoid for as long as they can.
It’s all about the signaling to marketsWhile Tokyo may have a massive chunk of reserves to work with in fighting back against the market, it is all about perception at the end of the day.
If they keep up with a weak-handed response in trying to defend the yen during a time when all other fundamental factors are going against the currency, it is just poor form. Mind you, the roughly $20-30 billion in intervention spent daily on previous occasions even if applied now will still be dwarfed by the over $1 trillion traded in the USD/JPY market during the day.
As to why it does work previously, it is because intervention is meant to be a signaling effect. If used sparingly and effectively, it will have its desired impact. However, what Japan needs to be careful with is to desensitise markets with small actions that don’t signal very strong intentions.
Think of it as traders are now starting a bonfire and letting it spread around for a bit. When Japan comes in with a warning, traders will heed that warning because they know that Japan has a very big fire extinguisher that could call off the party. So, it is a question of finding that line between how much markets will respect the warning and threats from Japan, and if traders should continue to keep pouring the gasoline on the fire again.
In short, it’s all about delivering the right signal to get markets to back off from punishing the yen. However, that task is made extremely difficult now by the prevailing fundamental backdrop.
As such, any intervention attempts by Tokyo may not be as effective and may not be as lasting as before. So, they need to be careful in how they keep this up.
A little help perhaps?Is it about time that Japan tries to seek help from the US for joint intervention? It’s a very touchy subject but given the circumstances and desperation, this might be one alternative.
All else being equal, it will be more effective than Japan going at it alone to try and intervene and stop traders from selling the yen.
However, this starts to border on politics and it would need the US to acknowledge that the yen is being “mistreated” while also arguing that the dollar is “too strong”. I just don’t see that happening as it would require the US to take more of a dollar policy stance than being able to isolate it as a reaction to the yen and global market situation.
As such, it looks very much that Japan will be on its own in dealing with this.
This article was written by Justin Low at investinglive.com.
