Sharp Yen Rebound Suggests Government Intervention
The Japanese yen made a significant recovery against the dollar on Monday, after hitting a 34-year low earlier in the day. Traders observed that the yen’s swift rebound had all the hallmarks of a government intervention. Around 1 pm Tokyo time, the yen surged from ¥159.5 per dollar to ¥154.5 in just 50 minutes. Market participants in Hong Kong, Australia, and London speculated that Japan’s finance ministry had likely intervened by selling dollar reserves and buying yen, marking the first such move since late 2022. The yen later settled around ¥156.8.
Yen’s Slide Past ¥160 Triggers Intervention
Earlier on Monday, the yen had dropped below ¥160 against the dollar, exacerbated by the widening interest rate gap between Japan and the US. This decline followed the Bank of Japan’s decision to maintain near-zero interest rates, with no indication from Governor Kazuo Ueda of concern over inflation pressures from a weak yen. Analysts noted that the Japanese government might have taken advantage of the closed domestic markets, due to Golden Week, to intervene in lighter trading volumes. The intervention, estimated between $20bn to $35bn, was believed to have been prompted by the yen breaching the ¥160 level.
Government’s Stance on Currency Volatility
Japan’s top currency official, Masato Kanda, refrained from confirming whether the Ministry of Finance had intervened. However, he emphasized the government’s readiness to address “speculative, violent, and abnormal moves” in the currency market that could harm the economy, with a commitment to respond “24 hours, 365 days.” The sudden volatility in the yen likely led some investors to unwind large bets against the currency, which had been accumulating in recent weeks. Tokyo had previously warned of potential support for the yen if trading became excessively volatile.
Economic Impact of a Weaker Yen
The depreciation of the yen has had mixed effects on Japan’s economy. While it has boosted inbound tourism and increased corporate profits earned overseas, the weakening currency has also escalated living costs and dampened domestic consumption, prompting business leaders to urge the government to take action. Since the beginning of the year, the yen has lost about 10 percent of its value against the dollar, driven by expectations that the US Federal Reserve will maintain higher borrowing costs to control inflation. The “yen carry” trade remains a significant factor, where investors borrow yen at low costs to invest in higher-yielding assets.
Outlook for Continued Interventions
Shusuke Yamada, head of Japan foreign exchange and rates strategy at Bank of America, stated that preventing the yen from falling below ¥155 per dollar would likely require ongoing interventions by Japanese authorities until the Bank of Japan raises interest rates. Such a move is not anticipated for at least three more months. Yamada also noted that any future interventions would need to be more substantial than those in 2022, which amounted to about $62bn. Meanwhile, JPMorgan’s senior economist for Japan, Benjamin Shatil, cautioned that any intervention’s effect might be limited, as investors continue to exploit Japan’s low interest rates, keeping the yen as a favored funding currency.