Japanese Authorities on Alert for Yen Intervention
Japanese authorities are closely monitoring the yen’s depreciation as traders increasingly bet against it, prompting discussions about potential currency intervention. Masato Kanda, Japan’s top currency official at the finance ministry, conveyed their readiness to take action if deemed necessary.
Kanda emphasized their state of readiness but refrained from specifying the nature and timing of potential interventions. This announcement resonates with their similar stance a year ago when Japan initiated three market interventions. The aim is to prevent excessive volatility and sudden moves in currency values.
The yen, after its biggest one-day drop since April, regained some strength following Kanda’s remarks and was trading around 151.27 per dollar as of 1:47 p.m. in Tokyo. The previous day had seen a significant 1.7% decline.
Yen’s Slide and Its Historical Threshold
Despite this intraday recovery, the yen is on a longer-term path toward 152 per dollar, a level that previously prompted Japanese authorities to intervene in the market. Such a rapid movement, where the yen shifts by more than two units within a single day, aligns with the volatility that led Japan to spend over $60 billion on currency purchases last year. Additionally, the yen weakened to its lowest level against the euro since 2008 on Tuesday.
Speculation and Market Concerns
Kanda voiced his concern about speculative-driven one-sided currency movements. Fundamentals typically do not account for such abrupt shifts in the foreign exchange market. The Finance Ministry data showed no currency market intervention between September 28 and October 27, although there were discussions in markets suggesting possible Japanese intervention during a sudden yen appreciation episode in early October.
Japanese Government Bond Yields
Japanese government bond yields experienced a slight increase on Wednesday, contrasting with a minor decrease in their U.S. counterparts. This movement lent mild support to the yen. Although the central bank conducted an unscheduled bond-purchase operation in the afternoon to curb yields, it had only limited impact on both the bond and currency markets.
Market Sentiment
Market participants appear undeterred, showing little fear of Japan initiating currency purchases to halt the yen’s decline. Speculative bets in favor of a weaker yen, along with leveraged funds increasing short positions following the BOJ meeting, continue to grow.
The Role of the Bank of Japan
The Bank of Japan (BOJ) has been cautious in loosening its control over bond yields, maintaining a 1% effective ceiling on 10-year government debt. This stance sets it apart from other major central banks adopting more hawkish approaches. As a result, Japanese bond yields remain significantly lower than those in the U.S. and Europe, contributing to the yen’s ongoing decline as Japanese investors seek higher yields abroad.
Shift in Monetary Policy Needed
Without direct intervention, foreign exchange traders and strategists believe that a substantial shift in monetary policy and a narrowing of yield differentials between the U.S. and Japan are required to halt the yen’s slide. The yen has fallen over 13% against the dollar this year, following a similar decline in 2022.
Ultimately, the BOJ’s adjustments may not be sufficient to steer the yen toward appreciation. Additional policy changes and a more dovish pivot from the U.S. Federal Reserve might be necessary to reverse the yen’s depreciation trend.
In conclusion, concerns about the yen’s depreciation have led to warnings of potential intervention by Japanese authorities. Despite the BOJ’s recent adjustments, a significant policy shift may be needed to stabilize the yen’s value.
