On Monday, the yen experienced a huge shock, soaring more than 400 points from a 34-year low. Markets speculated that it was caused by the Japanese government's intervention in the market.

In response, Masato Kanda, the top head of foreign exchange at Japan's Ministry of Finance, responded that excessive currency fluctuations driven by speculation will have a negative impact on the economy. The authorities will take appropriate action to deal with such fluctuations, and stated that they will disclose whether to interfere with the foreign exchange market at the end of May.

The latest news shows that Japan's current account balance declined far beyond expectations, which may confirm the Japanese government's intervention on Monday.

This week, Japan will enter a consecutive Golden Week holiday, and exporters and others will stop buying yen. Until the government certifies to support the foreign exchange market, concerns that the yen may continue to depreciate are still spreading in the market.

How might Japan intervene?

J.P. Morgan Chase's Japanese market research department discussed the next possible Japanese government intervention scenario in a report released on Monday.

In terms of level of intervention. The report indicates that when Japan's Ministry of Finance intervened in September 2022, USD/JPY traded near the 145.9 level, but since then the yen has weakened again and surpassed this level.

Therefore, J.P. Morgan believes that the 160 level should not be viewed as an “intervention line.” The report explains that as a G7 member country, Japan's foreign exchange intervention should abide by G7's foreign exchange commitments and cannot target any specific foreign exchange rate level — the decision to intervene depends more on the speed and context of exchange rate changes rather than on specific exchange rate levels.

In terms of the scale of intervention. In 2022, MoF purchased a total of 9 trillion yen in yen.

According to the report, as of the end of March 2024, Japan's official foreign exchange reserves included 994 billion US dollars in “securities” and 155 billion US dollars in “deposits.” Theoretically, the Japanese Monetary Fund (MoF) could use all reserves to intervene in foreign exchange, but in reality, the MoF is unlikely to do this.

The report explained that under the G7 foreign exchange commitment, foreign exchange intervention is a special action and is only used to deal with short-term transient fluctuations in the market.

In terms of frequency of intervention. In 2022, Japan intervened in the foreign exchange market three times in total (September 22, October 21, and October 24).

According to the International Monetary Fund (IMF), foreign exchange intervention for three consecutive days is considered a series of interventions, while countries using a “free-floating” exchange rate system can only carry out at most three series of interventions within six months. Frequent intervention by the Japanese government could increase the risk that Japan will lose its status as a “free-floating” nation.

A piece of data “confirms” Japan has taken action

Tonight, the Bank of Japan reported that due to fiscal factors such as government bond issuance and tax payments, the current account declined by 7.56 trillion yen (about 48.2 billion US dollars), far exceeding the 2.1 trillion yen previously generally anticipated by the market.

According to media analysis, this means that the Japanese government may have operated an intervention of at least 5.5 trillion yen on Monday.

Earlier, some opinions pointed out that if the forecast value is reduced by far greater than the estimated value of private institutions on Monday, it may mean that the government has already entered the market to buy yen. Since foreign exchange transactions are settled within two working days, if the Bank of Japan buys yen against the US dollar on Monday, it will be reflected in Wednesday's data.

Editor/Somer