How does Japan intervene in the foreign exchange markets?

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Speculation that Japan could step in to support its currency has revived several times this year as the yen plunged to its lowest level in 24 years against the US dollar. In mid-September, the Bank of Japan reportedly carried out a so-called rate control, a move often seen as a precursor to actual intervention. A few days later it did just that, stepping in to support the yen for the first time since 1998. A month later it jumped again. These are extraordinary moves for a country that has long been criticized by its trading partners for tolerating or even encouraging a weak yen to benefit its exporters.

1. Is there a certain level that triggers an action?

While investors speculate on a “line in the sand” that authorities are determined to uphold, it is never absolute. Authorities tend to talk more about containing excessive movement rather than defending specific levels. Senior currency official Masato Kanda, who confirmed the September intervention, described the changes in the foreign exchange market as having been sudden and one-sided. The government intervention on October 21 came after the currency fell to a new 32-year low at 151.95. The first, on September 22, took place after the yen broke above 145 and continued to decline following the BOJ’s decision to keep rates ultra low. This took it within striking distance of the 146.78 level reached before a joint intervention by Japan and the United States to support the yen in 1998.

Read more: Why the yen is so weak and what it means for Japan

2. What is a rate control?

In past instances, the BOJ would call traders to inquire about the price offer of the currency against the dollar. This is a step below an actual yen transaction and is meant to serve as a warning to traders to avoid one-way bets. This usually happens when volatility increases and regular verbal warnings from ministers do not have the desired effect. Prior to mid-September, the last reported rate check was in 2016 as the yen rose. It continued to rise despite this decision and only retreated after the US Federal Reserve embarked on a series of rate hikes and the BOJ introduced yield curve control – a policy that aims to maintain the yield on 10-year government bonds at the set level.

3. Who calls to intervene?

The Ministry of Finance decides to intervene in the market and the Bank of Japan takes care of the purchase or sale. It is usually preceded by a succession of carefully choreographed verbal warnings by officials. If they say the government is not ruling out any options or that it is ready to take decisive action, this is usually meant to give the markets maximum alert to the impending intervention.

4. Where does the money come from?

When supporting the yen, the dollars come from Japan’s foreign exchange reserves, which limits its firepower. At the end of August, Japan had $1.17 trillion, more than at the time of the April 1998 intervention. That’s a ratio of 2.4 times the daily market value of currencies in Tokyo, compared to the 1.4 times buffer it had last time. However, a unilateral move is still considered unlikely to succeed without US support. During the September intervention, Japan spent nearly $20 billion to limit currency losses.

5. Is the intervention a good idea?

Although intervention is a clear way to tell speculators that you will not allow your currency to free fall, it will only be a temporary fix unless the economic fundamentals driving the trend are correct. also taken into account. Additionally, foreign exchange reserves are generally there to protect the economy in the event of a major financial shock or unexpected event, not to artificially support your currency.

6. Should Japan go it alone?

Most likely. He was able to gain support from the Group of Seven for intervention after the 2011 tsunami and during the Asian financial crisis. But things are different now. Its main partners generally do not like countries to fix or influence exchange rates and want market forces to do the work. The G-7 and the Group of 20 – both of which include Japan – have agreements to this end. The current weakness in the yen is partly due to a combination of continued monetary stimulus from the BOJ and rate hikes from the Fed. In that sense, it could be seen as a Japanese-led event, which could weaken the case for action.

7. How do I know if the government has intervened?

Sometimes the government announces it, as it did this year. In 2011, the Minister of Finance summoned the press and announced the coordinated G-7 response as it happened. A sudden long vertical line on a price chart can also signal that the BOJ has bought or sold, but sometimes these moves can be triggered by panicked people in the market. The Ministry of Finance publishes intervention figures at the end of each month, even if it has not made any purchases or sales.

(Add October 21 intervention in introduction and first question, amount spent in September in question four.)

More stories like this are available at bloomberg.com

About Ruben V. Albin

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