Despite the suspected Japanese FX intervention totalling around $65 billion, USD/JPY climbing steadily back.
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Japan’s currency intervention mechanism sits at the intersection of fiscal and monetary authority in a way that is unlike most other developed economies. The power to intervene in foreign exchange markets rests not with the Bank of Japan but with the Ministry of Finance, a distinction that is often misunderstood but is fundamental to how the system operates.
Under Japan’s Foreign Exchange and Foreign Trade Act, the Minister of Finance holds the legal authority to conduct intervention operations in the currency market. When the Ministry determines that yen moves have become disorderly, excessive or inconsistent with economic fundamentals, it issues an instruction to the Bank of Japan to execute trades on its behalf. The BOJ acts purely as the Ministry’s agent in this process, carrying out the physical transactions but exercising no independent judgement on whether or when to act. The decision is entirely political and administrative, not monetary.
The mechanics work through the Foreign Exchange Fund Special Account, a government account held at the Bank of Japan. When the Ministry wants to buy yen and sell dollars, for example, it draws on dollar reserves held in that account. The BOJ then goes into the market and executes the trades as directed. Japan holds the world’s largest foreign exchange reserves, giving the Ministry substantial firepower when it chooses to deploy it.
In practice, intervention decisions involve close coordination between the Ministry’s International Bureau, the BOJ’s foreign exchange division, and often the Finance Minister directly. Major operations are typically preceded by a period of increasingly pointed verbal warnings, a practice markets call “jawboning,” designed to signal intent and sometimes achieve the desired exchange rate movement without spending reserves at all.
Japan has intervened most visibly in recent years to support the yen when it weakened sharply against the dollar, most notably in 2022 (and now) when the currency fell to multi-decade lows. The Ministry authorised purchases of yen running into tens of billions of dollars across several operations. Results were mixed in the medium term, as the underlying interest rate differential driving yen weakness remained intact, but the interventions succeeded in slowing and temporarily reversing the pace of depreciation.
The arrangement reflects a deliberate constitutional choice to keep exchange rate policy out of the hands of the central bank and firmly under elected government control, a design that gives Tokyo considerable flexibility but also means currency policy and monetary policy can occasionally pull in different directions.
This article was written by Eamonn Sheridan at investinglive.com.
