Source: Finance Association
Author: Xiao Xiang

Although the Japanese authorities have yet to officially announce foreign exchange intervention, more and more official data from the US and Japan show that the two intraday surges in the past week are clearly inseparable from the Bank of Japan...

Let's first take a look at the “evidence” provided by the Federal Reserve. According to the latest data from various accounts of the Federal Reserve, the Bank of Japan is likely to have funded monetary intervention in the past week through two potential methods to support the troubled Japanese yen.

One source may be a foreign reverse repurchase agreement tool provided by the Federal Reserve — where central banks deposit overnight cash to earn market interest rates. According to data from the Federal Reserve Central Bank, as of May 1, the amount held by the Federal Reserve's foreign reverse repurchase agreement financing mechanism decreased by about 8 billion US dollars from a week ago, to less than 360 billion US dollars. This is the first decline since the week ending April 10.

Furthermore, the size of a separate cash account used by the central bank has also been reduced by about 17.8 billion US dollars.

In the week covered by these data, Japanese policymakers (Monday noon and early Thursday morning Beijing time) may have intervened in the foreign exchange market. The yen is the weakest performance against the US dollar among G10 currencies this year.

However, if the “evidence” from the Federal Reserve side is still shrouded in relative fog, some of the “telltale signs” left by Japan should be even more clear.

Through in-depth analysis of the Bank of Japan accounts, industry insiders speculated that such intervention did exist. According to a comparison of Japanese bank accounts and currency brokers' forecasts, the latest intervention funds used by the Japanese authorities on Thursday may be around 3.5 trillion yen (about 22.5 billion US dollars).

The Bank of Japan reported on Thursday that due to transactions with government departments, its current account balance could drop 4.36 trillion yen the next business day — that is, next Tuesday (due to market closure). In contrast, the average forecast of money brokers without intervention was 833 billion yen. The above estimate of 3.5 trillion yen was obtained by subtracting the two sets of data.

Previously, market participants had already used the same method and estimated that the scale of the Bank of Japan's intervention could be as high as 5.5 trillion yen by Monday. When the two are combined, the total scale of the Bank of Japan's two interventions this week may have reached 9 trillion dollars (close to 60 billion US dollars at the current exchange rate).

This number is clearly not small. By contrast, in the last forecast for September to October 2022, Japan's Ministry of Finance spent a total of 9.2 trillion yen in the three operations, which also indicates that the scale of the current intervention is similar to that time.

Of course, the comparison of these estimates with central bank accounts yields only approximate figures, not specific amounts. Official monthly data on the scale of intervention by the Japanese authorities will not be released until May 31. To see specific daily data, traders will have to wait until August or later.

Gennadiy Goldberg, head of US interest rate strategy at TD Securities, said, “They (the Japanese authorities) have hidden the intervention measures very well. They must have prepared ahead of time; for example, they didn't make rolling investments in advance and kept a large amount of money in cash.”

Interventions also focus on “favorable time and place”

Judging from the two suspected market entry intervention windows this week, it is clear that the Bank of Japan is also trying to take advantage of “time and location” to a greater extent.

Monday's suspected intervention happened during the Japanese holiday. The yen exchange rate once fell to a 34-year low of 160.17, but then rebounded sharply during a light trading period. Meanwhile, on Wednesday, after the Federal Reserve's two-day policy meeting ended and unexpectedly “released pigeons,” the yen suddenly rebounded more than 3% in the last few hours of the New York session.

Yuya Kikkawa, an economist at the Meiji Yasuda Research Institute, said, “With the arrival of Japanese holidays and US employment data, this is a very good time for the authorities to deal with speculators. This will have a huge impact on the market. I feel the strong determination of the Japanese authorities to defend the bottom line of 1 dollar to 160 yen.”

According to data previously released by Japan's Ministry of Finance, as of the end of March, Japan's foreign exchange reserves were about 1.15 trillion US dollars, an increase of 4.6 billion US dollars over the previous month. Of this, about $155 billion was held in the Bank for International Settlements and other foreign central banks, a slight decrease from $155.7 billion at the end of February.

It is worth mentioning that although the balance of the Federal Reserve's foreign reverse repurchase agreement instrument has declined in the Bank of Japan's suspected execution this time, Citigroup strategists mentioned in a report last month that Japanese officials did not use the Federal Reserve's tool in the last round of monetary intervention in 2022, and most of the funds in this instrument have not been used for nearly 10 years.

In response, Citi instead believes that investors should pay attention to changes in Japanese and US treasury bonds. The agency's strategists expect that if the Bank of Japan intervenes again, it may sell some short-term US Treasury bonds.

Editor/Jeffy