Japan’s latest episode of intervention in FX markets, meant to prop up the Yen against an overwhelmingly strong US Dollar, may be falling flat. Tokyo’s Ministry of Finance likely spent tens of billions of Dollars in two separate actions last week, which initially reduced the USD/JPY rate by more than -4%, but a chunk of that impact has been wiped away in the days since. Without an increase in the Yen’s momentum, the Ministry of Finance could begin to look desperate and incentivize traders to increasingly bet against them.
A successful Yen-boosting intervention in 2022 took advantage of the Federal Reserve reaching a dovish turning point in its own monetary tightening, but a similar pivot point appears to be some way off today. Bank of Japan (BoJ) policymakers have injected a more hawkish tone into their rhetoric recently, likely in a bid to help stem the tide of the Yen sell-off, but they appear determined to follow the path of inflation instead of currency volatility in terms of rate-setting. These two factors are not totally separate, however, as Japanese prices could be exposed to upward pressure from imports.
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Though Japan’s Ministry of Finance (MoF) used intervention in foreign exchange (FX) markets to garner some success in reversing recent gains in the US Dollar-Japanese Yen exchange rate (USD/JPY), which had surged beyond the 160.00 level for the first time since 1990 late last month, this progress may prove to be short-lived. After two sudden tumbles in the exchange rate, likely indicative of MoF activity in the currencies market, USD/JPY skidded all the way to 153.00 last Friday. However, that rate had perked back up to nearly 156.00 by this morning. As of yesterday, Bloomberg reported that momentum was beginning to shift back against the Yen among traders, with leveraged funds largely re-entering bets on the beleaguered currency slumping back toward its pre-intervention weakness.
Hanging over the Yen is the prospect of intervention’s diminishing returns and its ability to potentially work against its intended goals if utilized too frequently. The operation Tokyo is currently undertaking is largely psychological in nature. As much as the government wants to create a significant bid for Yen by utilizing the Dollars it has in reserve, thereby driving up the value of its own currency, it also wants to convince a much larger sum of independent capital controlled by foreign exchange traders to follow its move and believe this kind of state-backed action is a definitive step in reversing the course of Yen and Dollar exchange rates. If Yen weakening persists in the face of Japanese intervention in FX markets, subsequent actions by the Ministry of Finance to stabilize or reverse USD/JPY (and its exchange rate with other currencies) could begin to look desperate and lacking authority, pushing some speculators to start betting on an even more bearish Yen. Such a scenario has the potential to begin exhausting Japan’s…
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