Japan intervenes in the market for FX to stop the yen’s fall following BOJ continues to keep rates at record lows
TOKYO (Reuters) TOKYO (Reuters) Japan intervened on the market for foreign exchange on Thursday to purchase in yen, for the first time since in a bid to strengthen the battered currency following it was discovered that the Bank of Japan stuck with extremely low rates of interest.
The change, which occurred during the late Asia hours witnessed the dollar plummet over 2% to about 140.3 yen. There was no indication of intervention or support to the BOJ from the other central banks. The dollar was 1.25 percent lower at 142.25 in yen in 12:00 p.m. ET/0707 GMT. [FRX/].
It was trading earlier at a higher level of 1% due to the BOJ’s decision remain in its ultra-loose policy stance, in contrast to an international trend of tightening monetary policy by central banks fighting rising inflation.
“We have taken decisive action,” vice-finance Minister for International Affairs Masato Kanda said to reporters, saying positively when asked whether that meant an intervention.
Analysts, however, were skeptical whether the move would stop the yen’s slide that has been going on for the long. The currency has appreciated around 20% this year, falling to its 24-year lows, mostly due to more aggressive U.S. interest rate hikes propel the dollar higher.
“The market was expecting some intervention at some point, given the increasing verbal interventions we have been hearing over the past few weeks,” said Stuart Cole, head macro economist at Equiti Capital in London.
“But currency interventions are rarely successful and I expect today’s move will only provide a temporary reprieve (for the yen).”
The Finance Minister Shunichi Suzuki declined to disclose how much the government had invested in buying yen as well as did other nations have acceded to the decision.
On Thursday, the U.S. Treasury acknowledged the BOJ’s intervention, but fell short of approving the intervention.
Two months back U.S. Treasury Secretary Janet Yellen stated about the depreciation of the yen that Washington believed that intervention in the currency market was appropriate just in “rare and exceptional circumstances” and that it was the market that should determine the rates of exchange for G7 countries.
Assisting Suzuki during his briefing Kanda stated that Japan is in “good communication” with the United States, but declined to confirm whether Washington has ratified Japan’s involvement.
As an agreement, currency intervention requires the consent of the Japan’s G7 counterparts, including those from the United States, if it is to be conducted against the dollar/yen.
The Bank of Canada said on Thursday that it was not involved in any intervention on the market for currency.
The announcement came just hours from the time the BOJ made its decision of keeping rates close to zero in order in order to boost the country’s weak economy, a situation that many experts believe is becoming increasingly unsustainable given the shift in global trends towards more expensive cost of borrowing.
BOJ Governor Haruhiko Kuroda said to reporters that the central bank might put off raising rates or altering its policy guidelines for a number of years.
“There’s absolutely no change to our stance of maintaining easy monetary policy for the time being. We won’t be raising interest rates for some time,” Kuroda stated after the decision on policy.
The BOJ’s decision came just after that the U.S. Federal Reserve delivered its third straight rate rise in the form of 75 basis point on Wednesday. It also warned of more significant hikes to come and highlighting its determination not to relent in the fight against inflation and delivering a increase for the currency.
Japan is also the only among the major economies that kept short-term rates in negative territory following The Swiss National Bank on Thursday increased it by 75 basis point. This ended the years of negative rates targeted to limit the appreciation of the currency.
SNB Chairperson Thomas Jordan told a briefing his bank did not take an active part in coordinated efforts to help support the yen.
THE POWER OF THE ENDING RESORT
With the BOJ ruling out an immediate rate hike in the near future, the intervention in currency was the most effective — and perhaps last resortweapon Japan was left with to stop the sharp decline in yen that was increasing import costs and could hurt consumption.
GRAPHIC: Japan’s history of yen interventions https://fingfx.thomsonreuters.com/gfx/mkt/xmpjoykbovr/Pasted%20image%201650518854154.png
“The first Japanese currency intervention in near a quarter century is a significant, but ultimately doomed step to defend the yen,” said Ben Laidler, global markets strategist at Etoro in London.
“As long as the Fed stays on the hawkish, rate-raising front foot, any yen intervention is likely to only slow, not halt, the yen slide.”
The buying of yen has been uncommon. The most recent occasion that Japan intervened to protect its currency was in 1998 during it was the Asian financial crisis led to the sell-off of yen and an accelerated capital outflow of the area. Prior to this, Tokyo intervened to counter declines in the yen in 1991-1992.
The process of buying yen not as easy as selling it.
In an intervention to sell yen, Japan is able to print dollars to be sold in the marketplace. However, to purchase the currency, it has to draw from its $1.33 trillion reserves of foreign currency, which, although plentiful, may soon shrink in the event that huge sums are needed to affect rates.
