Japan spent a record US$62.2 billion in the past month to prop up the yen after it fell to a 34-year low against the dollar, surpassing the total amount it used in 2022 to defend the currency.
The finance ministry disclosed figures on Friday (May 31) for the period between April 26 and May 29. The amount exceeded earlier estimates of 9.4 trillion yen (S$80.8 billion) based on a comparison of the Bank of Japan’s accounts and money broker forecasts. Japan’s previous monthly intervention record of 9.1 trillion yen was set in very different circumstances when authorities were trying to weaken the yen in autumn 2011.
The record spending on intervention shows the commitment of Japan’s government to push back against speculators betting against the yen. The huge amount also underscores the scale of action required to have even a short-lived impact on the market and the gradually diminishing power of its salvos to defend the currency.
“The amount feels a touch on the large side, but it’s largely in the expected range,” said Hirofumi Suzuki, chief FX strategist at Sumitomo Mitsui Banking Corp. “It didn’t top 10 trillion yen so it doesn’t feel too big and the dollar-yen pair isn’t actually reacting much.”
The yen was down about 0.3 per cent at 157.25 versus the dollar at 7.20 pm in Tokyo time, little changed from where it was before the data release.
The data for each reporting month typically include the last two working days of the previous month. More details of how it carried out the interventions will likely emerge when the government releases its foreign reserves breakdown next week and daily operations data including April and May in the summer.
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The yen is expected to remain under pressure given the yawning gap between interest rates in Japan and the US. While the BOJ has finally joined the Federal Reserve in tightening monetary policy, Japan’s short-term rate is still just 0.1 per cent compared with the Fed’s 5.5 per cent.
Until there are clearer signs of when US rates will start coming down or of the BOJ pushing more aggressively to raise borrowing costs or cut back its bond purchases, there is little prospect of the tide turning.
Currency officials in Japan are aware that their efforts simply buy time rather than reverse dynamics. From that perspective the interventions have been relatively successful. While the yen has given up a large portion of the gains from a month ago, it still hasn’t returned to the 160 mark against the dollar.
“You can’t really say how much impact you’ll get from spending a certain amount of money, since markets are like living creatures,” said Hideo Kumano, executive economist at Dai-Ichi Life Research Institute and a former central bank official. “But without the intervention, the yen would have weakened even more, so I believe that the roughly 10 trillion yen operation was effective.”
Japanese officials remained silent on whether they stepped into the market as part of their tactics to keep market participants in the dark and maintain wariness of intervention among speculators. This time, the authorities succeeded in buying about a month’s worth of time by conducting interventions at the very beginning of the latest reporting period.
Japan funds its intervention to buy yen by selling from its foreign currency reserves. Figures for the end of April showed the nation had US$1.14 trillion in those reserves, suggesting Tokyo still has plenty of firepower to take on the yen bears.
Still, Japan can only draw on a portion of the reserves to back up its currency, given the need to keep forex on tap in case of global crisis or other emergency.
The nation also has to consider its international commitments to letting markets determine exchange rates.
US Treasury Secretary Janet Yellen has repeatedly said in recent weeks that currency intervention should be a seldom-used tool that officials give fair warning about when they resort to it. Group of Seven nations have agreed not to tinker with exchange rates unless they are tamping down extreme volatility, she noted earlier this month.
If the yen continues to weaken, pressure may increase on the Bank of Japan to take more action to stem the currency’s weakness.
Already there are signs that BOJ Governor Kazuo Ueda has adjusted his messaging on the yen to show more openness to the possibility of raising interest rates if the yen fuels inflation. The change in tone followed a meeting with Prime Minister Fumio Kishida in early May after the latest interventions.
Ueda’s remarks following the April BOJ policy meeting were seen to have fuelled yen weakness that prompted intervention. That outcome mirrored a similar series of events in September 2022.
Still, the central bank has shifted since Ueda took the helm, raising interest rates for the first time since 2007 and dropping a cap on 10-year government bond yields. Allowing the yield to rise above 1 per cent has likely prevented the currency weakening well into the 160 range against the dollar.
“The bank is probably thinking it messed up its communication a bit in April,” Kumano said. That doesn’t mean a rate hike is looming in July, but it will likely hint at one in the pipeline while it also boosts expectations of higher yields, he added. BLOOMBERG
