After the Bank of Japan’s decision to keep its monetary policy unchanged, the yen tumbled during governor Haruhiko Kuroda’s news conference, only to abruptly reverse course. At 5pm local time, when the yen was trading 145.7 against the dollar and everyone was waiting for a plunge beyond the 146 mark, the currency suddenly jumped by more than 1 yen, ultimately climbing back past 141.
“It was carefully aimed to counter speculators who had been driving the yen down,” said an insider at a Japanese bank who was surprised at the impact of the move.
When the BOJ conducted an exchange rate “check” on Sept 14, after a drop past 144 to the dollar, market watchers speculated that 145 would be the central bank’s line in the sand. But nearly all thought its response would be limited to jawboning, given the many constraints on direct intervention.
The biggest problem is the apparent disconnect involved in propping up the yen while keeping monetary policy loose – an environment that encourages depreciation. “The BOJ’s easing and the yen buying contradict each other,” said Yujiro Goto at Nomura Securities.
The central bank, prioritising support for the economy, is sticking firmly to its dovish policy approach, at the cost of letting the yen soften far enough to force the government’s hand. But Tokyo’s ability to push the currency back up will be limited so long as the BOJ does not change the underlying picture by raising interest rates.
Funding the intervention is another issue. “Yen buying comes with its own unique difficulties,” said Eisuke Sakakibara, a former vice finance minister who was closely involved in the last such intervention in 1998 and called Thursday’s move “quite unexpected”.
The Japanese government holds dollars and US Treasury bonds in its foreign exchange reserves, which it taps to sell dollars for yen. That puts a ceiling on this type of intervention, unlike yen selling, which could theoretically be unlimited.
The US did not participate in the intervention. “The Bank of Japan today intervened in the foreign exchange market. We understand Japan’s action, which it states aims to reduce recent heightened volatility of the yen,” a Treasury spokesperson said.
Japan’s foreign exchange reserves totalled US$1.29 trillion, or around ¥185 trillion, at the end of August. While this may look like a healthy sum, foreign exchange turnover in Japan averages over US$370 billion a day, according to an April 2019 survey by the Bank for International Settlements.
Disregarding that the trading figure includes other currencies besides the dollar, a simple calculation suggests that Tokyo’s reserves are equivalent to only about three days worth of firepower.
“The market’s scale is immense, and foreign exchange reserves realistically can’t cover all of it,” said Takahide Kiuchi of the Nomura Research Institute. “The effect isn’t sustainable.”
The fact that the yen’s weakness is rooted in global fundamentals means Japan may be in for a long tug of war with speculators.
Long-term bond yields in the US have climbed roughly 2 percentage points so far this year to over 3.5%, while the Bank of Japan stood pat again Thursday on its 0.25% cap – a growing gap that heightens the downward pressure on the yen.
“If the government artificially halts the yen’s depreciation, which is happening for clear reasons – the widening interest rate differential and the trade deficit – it’ll become easier for speculators to jump onto that contradiction,” said Tohru Sasaki at JPMorgan Chase Bank.
Japan’s last yen-buying interventions in 1998 failed to make a significant dent. The government stepped in in April and June, but the downtrend did not end until August, amid a financial crisis in Russia.
Some in the business community have welcomed the effort to shore up the yen, as dramatic currency moves make it harder for companies to make plans. “It was significant that they showed that they won’t let sharp swings go unaddressed,” Masakazu Tokura, chairman of the powerful Keidanren business lobby, said in a news conference Thursday.
Foreign hedge funds, meanwhile, argue that investors will take advantage of incoherent and irrational moves. The government’s decision to intervene may end up dragging it into a quagmire.