Japan Keeps Yen Traders Guessing Over Whether It Intervened

Japanese officials are sticking with their strategic silence on currency intervention as speculation swirls over whether the government acted to prop up the yen.

(Bloomberg) — Japanese officials are sticking with their strategic silence on currency intervention as speculation swirls over whether the government acted to prop up the yen.

The finance minister, the top currency official and the government’s chief spokesman all said Wednesday they wouldn’t comment on whether Japan stepped into markets.

Evidence is starting to emerge via early estimates and market analysts that the market jolt likely wasn’t caused by a major currency intervention. Among other possible explanations for the sharp market moves on Tuesday: a combination of jittery markets and trading algorithms responding to the yen’s slide through the key 150 per dollar threshold. 

Either way, the lingering seed of doubt serves Japanese interests by keeping traders on edge.

Less satisfactory for Japan’s policymakers, including the finance ministry’s currency chief Masato Kanda, is the paring of yen gains that followed. That suggests they still have a problem on their hands with the currency weakness. If the move was caused by intervention, the impact was much smaller than three previous forays into the market last year that totaled more than $60 billion.

“I can’t say with full confidence if they intervened or not,” said Hideo Kumano, economist at Dai-Ichi Life Research Institute. “I think Kanda is trying to increase the psychological impact even with small amounts by not saying anything.”

Read More: Yen Surges From Weakest Level in a Year Amid Intervention Talk

The yen reached 150.16 per dollar on Tuesday in New York trading, its cheapest since multi-decade lows were set in October 2022, before soaring nearly 2% in a matter of seconds to 147.43. Japan stepped into markets last year before the currency hit the 146 and 152 marks.

The yen was trading around the 148.95 level Wednesday evening in Tokyo, back in the direction toward 150.

“We will continue with the existing stance on our response to excessive currency moves,” said Kanda, vice finance minister for international affairs. He declined to say if the overnight moves could be characterized as excessive.

Read more: Japan Bond Slump Puts More Pressure on BOJ to Tweak Policy

“While we are basically like a Gulliver in the market, we’re also coming and going as a market player, so usually we won’t say whether or not we’ve intervened each time,” Kanda said.

Japan appeared to switch its communications approach on intervention last year. Finance Minister Shunichi Suzuki confirmed the first intervention to prop up the yen since the late 1990s in September last year, but subsequent entries into the market in October were not immediately acknowledged. 

Japan reveals the size of its currency interventions on the last working day of each month, a measure that enables government officials to say they are transparent about entering markets even if they don’t confirm it at the time.

The approach helps keep market players guessing over Japan’s currency strategy, making it less clear how Tokyo might respond and potentially making it more difficult to decide on plays in the foreign exchange market.

Preliminary projections released Wednesday evening for the Bank of Japan’s current account are tallying with money broker forecasts showing flows in government funds for each day of this month. The lack of a large discrepancy suggests that a major currency intervention did not take place on Tuesday.

Read More: Early Estimates Suggest Japan Didn’t Buy Yen on Tuesday

The yen has continued to weaken in recent months as the dollar strengthens on the back of expectations of US interest rates staying higher for longer while the Bank of Japan stands pat on stimulus for now. The difference in Japanese and US rates has been a key driver of the trend. 

Still, market players have been wary of testing how far they can push the yen amid the repeated warnings from finance ministry officials that no options are ruled out should the currency weaken too quickly.

While officials have warned for months they would step in if they saw excessive volatility, Tuesday’s sharp yen rebound came with the currency down just 0.2% against the dollar. That suggested the breach of the 150 per dollar level was a key catalyst behind the move.

“Even if the authorities don’t say that 150 yen is a defense line, markets are watching the level closely,” said Atsushi Takeda, chief economist at Itochu Research Institute. “Just making the market suspect possible intervention at this line will have an impact.”

If the latest move was a result of intervention, it may leave Japan open to criticism from its peers given that it is defending a level, rather than an obvious sharp move. Multilateral agreements between major economies allow some leeway for intervention if movements are abrupt.

US Treasury Secretary Janet Yellen said last month that any intervention by Japan to prop up the yen would be understandable if it were aimed at smoothing out volatility — not at affecting the level of the exchange rate. Complaints about currency intervention are typically stronger when a country steps into markets to weaken a currency, a move that can be interpreted as an attempt to gain a competitive advantage on trade.

What Bloomberg Economics Says…

“It’s not clear what drove the spike in the yen after the dollar crossed 150 overnight – a rate check by the Bank of Japan, actual intervention or just an option-related trade that spooked the market. Our best guess — the first possibility.”

— Taro Kimura, economist

For the full report, click here.

Economists largely see intervention as a strategy to buy time until market dynamics shift. A change in monetary policy in Japan and a clear end to the Fed’s rate hiking cycle would likely provide that moment for the yen.

The BOJ allowed more movement in long-term bond yields in a tweak to its stimulus program in July. That adjustment enabled 10-year yields to edge up to their highest in a decade, a factor that may have slowed the decline in the yen in the face of broad dollar strength, but not by enough to stop the slide to 150.

Half of economists polled by Bloomberg last month expect the BOJ to take the more significant move of scrapping its negative interest rate in the first half of next year. 

“There’s no doubt that Japan is in a tough spot. It’s not about the weak yen but the strong dollar due to a strong US economy and increasing speculation that US rates will remain high,” said Takeshi Minami, chief economist at Norinchukin Research Institute. “Japanese authorities are in a very hard fight and it’s difficult to say when it’s going to end.”

–With assistance from Emi Urabe, Yoshiaki Nohara, Toru Fujioka, Sumio Ito and Cormac Mullen.

(Adds details on preliminary figures suggesting intervention did not take place.)

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