Japan ready to act again on forex if needed – PM Kishida

Japan is chasing its tail to interfere with the yen

(corrects rephrasing comments of paragraph 8)

By Vidya Ranganathan

SINGAPORE (Reuters) – As the Bank of Japan intervenes in currency markets for the first time in decades to defend the faltering yen, it faces many obstacles, chief among them its stubborn commitment to ultra-easy cash setups.

The sudden rush of intervention into yen buying on Thursday by Japanese authorities – for the first time since 1998 – led to a significant 6 yen move between 140 and 146 in the dollar-yen exchange rate.

At the end of the busy day, which also saw markets digest an optimistic Fed rate hike and the Bank of Japan pledged to keep interest rates negative, investors were no less inclined to bear on the yen, which is down nearly 20% so far this year.

“It’s quite symbolic in the sense that this is the first time since 1998, but I don’t think it will be effective in reversing the yen,” said Vincent Tsui, Asia analyst at Gavekal Research in Hong Kong.

Given the history of deflation, the BoJ’s desire to keep interest rates low until it sees a stable and healthy rate hike has left it a lone dove this year as other major global central banks raise rates to contain rising inflation. US policy rates are now three percentage points higher than those in Japan.

But the Bank of Japan’s policy is at odds even at home, with the government concerned about the impact of a weak yen on energy prices and consumer sentiment, and risk-loving households with idle cash reserves worth more than 1,000 trillion yen ($7.04 trillion). To search for assets with better returns abroad.

READ ALSO :   Japan ready to act again on forex if needed - PM Kishida

Governor Haruhiko Kuroda made it clear that policy will not change, and the yen purchased by the Bank of Japan as part of the intervention will be replaced.

He said Thursday that as long as the BoJ has a policy to control the yield curve, any monetary tightening caused by the yen-buying intervention will be neutralized, referring to the BoJ’s weekly bond purchases for maximum yields.

Brendan McKenna, International Economist and Currency Strategist at Wells Fargo (NYSE: Securities), points out how even with the intervention taking place, US yields rose about 6 basis points in the day and Japanese yields fell, sending an even bigger rush in interest rates and giving markets more reason to dump the yen.

“That the intervention was unilateral and that it occurred on the same day of the BOJ dove meeting is indicative of very large internal contradictions,” German Bank George Saravelos, Head of FX Strategy at ETR πŸ™‚ said in a note.

History shows…

Saravelos says such intervention, while Japan sticks to its yield curve control policy, will lead to a loss of central bank credibility, and may help reduce some speculative positions on the yen without really changing direction.

β€œIntervention to strengthen the currency is in direct conflict with the policy of the Bank of Japan,” Deutsche said, and that it is simply not credible for the central bank to devalue its currency through large amounts of quantitative easing while authorities seek a stronger currency at the same time.

Citi analysts note how the 1997-1998 bout of yen-buying intervention failed to reverse its depreciation.

READ ALSO :   UK store price inflation accelerates again to a new high - BRC

Unlike now, yields were far apart at the time but did not move against the yen. While the Bank of Japan intervened extensively between April and June 1998, the yen did not decline until September.

Still early days. James Malcolm, a strategist at UBS, thinks the intervention could be a coordinated campaign that lasts for several months, given the amount of speculation there is against the yen and the Japanese war treasury of nearly $1.3 trillion in foreign currency reserves.

He points to Japan’s lending to non-residents that hit a record $315 billion in the twelve months through July, three-quarters of which was short-term, most of it accumulating since March.

β€œThe success of an intervention is measured not in days but in decades,” Malcolm wrote, referring to the last time Japanese authorities bought $150 billion worth of roughly 75 yen in 2011. Some of that is being spent now, he believes.

(This story has been paraphrased to correct the rephrasing of comments on paragraph 8)

(dollar = 142.0800 yen)

Newsletter Updates

Enter your email address below to subscribe to our newsletter