Source: Wall Street News
Although the Japanese government has sufficient foreign exchange reserves to support the yen exchange rate by acting alone, without the support of the Federal Reserve's interest rate cuts, the cost of interfering in the foreign exchange market is also very high.
In recent weeks, the yen exchange rate has plummeted, and the US dollar quickly broke through 152 and 155 against the yen, the psychological threshold where Japan's Ministry of Finance might intervene. It even fell below 160 during the intraday session on Monday, setting a new record low since April 1990. The yen then rebounded strongly again. At one point, it recovered from the 155 mark and is now reported at 155.33, triggering market speculation that the Japanese authorities may have intervened.
In the face of the precarious Japanese yen, how will the Japanese authorities act? HSBC foreign exchange analyst Joey Chew and others have traced back the history of the Japanese government's intervention in the foreign exchange market and pointed out that although the Japanese government has sufficient foreign exchange reserves to support the yen exchange rate by acting alone, without the support of the Federal Reserve's interest rate cuts, the cost of interfering in the foreign exchange market is also very high.
If the Federal Reserve does not cut interest rates, intervention policies will be difficult to support
First, HSBC pointed out that judging from past experience, the impact of Japan's individual intervention on the foreign exchange market is far less than the impact of joint action between Japan and the US:
Coordinated interventions are often more effective than individual interventions. For example, the total amount of dollars sold by Japan and the US on June 17, 1998 was only 2.5 billion US dollars, but the impact on the dollar against the yen (the difference between intraday highs and lows was 6%) was greater than the previous two times when Japan acted alone:
On April 10, 1998, Japan sold $20 billion, and the difference between intraday highs and lows was 3.3%; compared with December 19, 1997, when Japan sold $5.4 billion, the difference between intraday highs and lows was only 1.4%.
HSBC also believes that the Federal Reserve's interest rate cut is a necessary condition and “amplifier” for the Japanese government to intervene:
The Federal Reserve continued to cut interest rates during the 1989-1990 intervention. About three months after the joint intervention of June 17, 1998, the Federal Reserve also cut interest rates.
In contrast, the Federal Reserve was still in a cycle of interest rate hikes during the September-October 2022 intervention period. Although it last raised interest rates in July 2023, the US still hasn't cut interest rates as of April 2024. As a result, USD/JPY is now about 9% above the September-October 2022 average.
Analysts stressed that if the Japanese government decides to intervene alone in the foreign exchange market at the point where the Federal Reserve maintains high interest rates, then considering the impact of the sharp increase in yen trading volume in recent years, larger intervention is needed to dominate the spot yen market. Analysts estimate that Japan's Ministry of Finance will need to use up to 100 billion US dollars of foreign exchange reserves to effectively intervene in the foreign exchange market:
In nominal terms, Japan's intervention has been intensifying over the years (1989-1990: $27 billion; 1997-98: $31 billion; 2022: $63 billion), but depending on the size of spot trading volume between the US dollar and yen, in order to dominate today's foreign exchange spot trading volume like the 1980s and 90s, Japan's Ministry of Finance may need to spend a total of 120 billion US dollars (35% of the recent average daily trading volume of USD/JPY).
However, if intervention were to be carried out without fail, it would not be a problem for the Japanese government. Japan has sufficient foreign exchange reserves. As of March 2024, its foreign exchange reserves reached 1.3 trillion US dollars, of which about 160 billion US dollars were deposits and 1 trillion US dollars were securities. Currently, total foreign exchange reserves can cover 20 months of imports, which is higher than 7-10 months in the 1980s and 90s of the last century.
Analysts also believe that Japan's weakness is the result of an ultra-loose policy. As Kazuo Ueda has begun to push for a shift in the Bank of Japan, it is also expected that the yen's fundamental headwinds will improve in the long run.
The history of Japanese authorities' intervention in foreign exchange markets
The last time the Japanese authorities interfered with the yen exchange rate was in October 2022, when the yen exchange rate fell to a low of around 152 yen per dollar. According to estimates, the Japanese authorities spent as much as 9.2 trillion yen (US$60.78 billion) to defend the yen exchange rate at the time.
The following is a schedule of the Japanese authorities' previous interventions in the foreign exchange market:
1973: The Japanese monetary authority decided to let the yen float freely against the US dollar.
1985: The five major industrial countries (G5, the United States, Japan, the Federal Republic of Germany, France, and the United Kingdom) signed the “Plaza Agreement”, agreeing to take joint actions to interfere in the foreign exchange market and weaken the US dollar index to resolve the huge US trade deficit.
February 1987: Six countries in the Group of Seven (G7) signed the “Louvre Agreement” with the aim of stabilizing the foreign exchange market and preventing a sharp decline in the US dollar.
January 4, 1988: The US dollar fell to 120.45 yen on the Tokyo Exchange, setting a new low after World War II. The Bank of Japan intervened to buy dollars and sell yen.
1991-1992: The Bank of Japan sells off the dollar to intervene to support the yen.
1993: The Bank of Japan sold the yen for most of the year to curb the strengthening of the yen.
April 1994 to August 1995: The exchange rate of the US dollar against the yen fell to its lowest point after the war. The US has intervened many times, usually cooperating with Japan and the European Central Bank to support the dollar.
1997-1998: The Asian financial crisis caused the yen to weaken, reaching 148 yen per dollar in August 1998. The Bank of Japan and the Federal Reserve jointly intervened to buy yen significantly.
January 1999 to April 2000: The Bank of Japan sold yen at least 18 times, including once through the Federal Reserve and once through the European Central Bank, due to concerns that a strong currency would hinder economic recovery.
2001/9: After the 9/11 terrorist attacks in the US, the yen appreciated rapidly. The Bank of Japan collaborated with the Federal Reserve and the European Central Bank to intervene in the foreign exchange market and sell the yen.
May to June 2002: The Bank of Japan, with the support of the Federal Reserve and the European Central Bank, once again interferes in the foreign exchange market and sells off yen.
March 2004: After Japan spent 35 trillion yen (more than 300 billion US dollars) to intervene, a 15-month operation to curb the appreciation of the yen came to an end.
September 15, 2010: After the US dollar exchange rate hit a 15-year low of 82.87 yen, Japan intervened in the currency market for the first time in six years, selling off yen to stop the currency from appreciating.
2011/3/18: After the earthquake, the yen exchange rate soared to a record high, and the Group of Seven (G7) jointly intervened to stop the yen from strengthening.
August and October 2011: In order to prevent an increase in yen orders from harming the export-led recovery of the Japanese economy, the Japanese authorities drastically sold the yen.
June 10, 2022: The Japanese government and central bank issued a joint statement saying they are concerned about the sharp decline in the yen against the US dollar after falling below 134 points (verbal intervention).
September 7, 2022: Supreme Government Spokesman Hiroshi Matsuno expressed concern (oral intervention) about the “rapid, one-sided” trend in the currency market after the yen fell below 143 points against the US dollar.
October 21-24, 2022: The US dollar exchange rate once plummeted by more than 7 yen in a single day. Sources believe this was due to the Japanese government buying yen. Japan's Finance Minister Shunichi Suzuki declined to confirm whether the government interfered in the foreign exchange market.
March 27, 2024: After the yen fell to a 34-year low against the US dollar, the Bank of Japan, the Ministry of Finance, and the Financial Services Agency of Japan held a meeting to express preparations to intervene (verbal intervention).
Editor/jayden