23.09.2022 – Major event on the currency market: The Japanese central bank intervened and supported the yen. USDJPY reacted immediately and violently. However, we wonder whether the desired result – a stronger yen – will hold.
What a week: several central banks raised interest rates at once. And the biggest event on this “Super Bank Thursday” was the intervention in Tokyo. The first move of its kind in 24 years – selling dollars, buying yen; in 2011 it was the other way around – caught many traders on the wrong foot. Many had assumed that Tokyo was just bluffing. Thus, things went violently downhill, as you can see in the hourly chart of USDJPY. However, after the presentation of the US unemployment figures, the greenback recovered somewhat. Thus, the new applications for unemployment benefits were 213,000, had been expected 218,000. And in the meantime, the effect seems to have already evaporated again.
Source: Bernstein Bank GmbH
The intervention was quite tricky and was obviously intended to mow down as many speculators as possible. For now, the Bank of Japan did nothing at all – it left short-term interest rates at minus 0.1 percent on Thursday and its target for the yield on ten-year Japan bonds at 0.25 percent. Central bank governor Haruhiko Kuroda announced that he does not think tightening monetary policy is an appropriate way to stabilize the yen. And the market assumed that everything would stay that way for the next two to three years. As a result, the yen slid to a 24-year low.
And then came the turnaround. Masato Kanda, vice finance minister for international affairs, told reporters that Japan had intervened in the market with a bold move.
Central Bank vs. Ministry of Finance
Many traders had previously written off recent warnings from politicians as cheap bluff. For example, recently Finance Minister Shunichi Suzuki had said Tokyo was not ruling out any steps to stop the yen’s fall, including government intervention. But after the central bank’s statement, traders assumed that the yen would continue to falter. From a distance, it all looks like a conflict between the Ministry of Finance and the monetary watchdogs.
Inflation not a problem?
Central bank chief Kuroda, for example, downplayed inflation. He had recently stated that inflation would likely fall to 1.5 percent by 2023. However, consumer inflation in Japan had reached 3 percent in August, exceeding the bank’s target of 2 percent for the fifth month in a row. Presumably, the BoJ sees an end to external shocks such as the Ukraine war or disrupted supply chains in the wake of Corona. Plus a pickup in the export engine, which would support the yen.
The Finance Ministry probably sees things differently. The problem: With the yen weak, imports are getting more expensive, since the Nippon is largely dependent on imports for food and energy. And here, prices are climbing rapidly. Thus, policymakers enforced intervention.
US Yield vs. Forex Reserves
The question now is how to proceed. Tokyo has forex reserves equivalent to $1.3 trillion – the second largest in the world after China. That’s a lot of ammunition to prop up the yen every now and then. However, the Japanese currency is being dragged down by a huge current – and that is the interest rate differential with the US. The need for yield from institutional investors all over the world, and not least in Japan, who are currently buying U.S. bonds en masse, is likely to hit the yen again soon. We are curious to see what happens next – Bernstein Bank wishes successful trades and investments!
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