How Does Japan Intervene in Currency Markets?

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The Japanese yen has fallen to a three-decade low against the dollar this year, prompting the government to step in to support its currency for the first time since 1998 — and likely more than once. These were extraordinary moves for a country that’s long been by trading partners for tolerating or even encouraging a weak yen to benefit its exporters.

1. Is there a certain level that triggers action?

While investors speculate about a “line in the sand” that the authorities are determined to defend, it’s never absolute. Authorities tend to talk more about containing excessive moves rather than defending specific levels. The 1998 joint Japan-US intervention came after the yen hit a level of 146.78. This year, Japan intervened on Sept. 22 when the yen came close to breaching 146 after a Bank of Japan decision to maintain ultra-low rates. Top currency official Masato Kanda, who confirmed that intervention, described the market’s shifts as having been sudden and one-sided. A month later, with the yen weakening past 151, Japan likely conducted its biggest ever intervention to support the currency, worth as much as 5.5 trillion yen ($36.9 billion), according to BOJ figures and market estimates.

Read more: Why the Yen Is So Weak and What That Means for Japan

2. How do we know if the government intervened?

Japan seems to be using a new playbook compared to a decade ago, in an apparent bid to increase the impact. Most of its intervention this year, confirmed and doubted, took place outside of regular Japan trading hours — unlike moves in 2010 and 2011 to weaken the yen. In contrast to back then, the government this year has only confirmed its action once — Kanda’s announcement — with the reluctance to do so seen as an additional tool to deter speculators. Shortly before the September move, the BOJ was said to have conducted a so-called rate check, a move often considered a precursor for actual intervention. A sudden, long vertical line on a price graph can also signal that the BOJ has bought or sold, but sometimes those moves can be triggered by panic in the market. The Ministry of Finance releases intervention figures at the end of each month, even if it hasn’t done any buying or selling.

3. What’s a rate check?

In past cases, the BOJ called traders to ask about the price offer of the currency against the dollar. It’s a step short of an actual yen transaction, and is meant to serve as a warning for traders to avoid one-way bets. It usually happens when volatility increases and regular verbal warnings by ministers don’t have the desired effect.

4. Who makes the call to intervene?

The finance ministry decides whether to intervene in the market and the Bank of Japan does the buying or selling. It’s usually preceded by carefully choreographed verbal warnings by officials. If they say the government isn’t ruling out any options, or that it’s ready to take decisive action, that’s usually meant to put markets on maximum alert that intervention may be imminent.

5. Where does the money come from?

When propping up the yen, the dollars come from Japan’s foreign currency reserves, which puts a limit on its firepower. At the end of August Japan had $1.17 trillion — more than it had at the time of the April 1998 intervention. That’s a ratio of 2.4 times the daily value of the currency market in Tokyo, compared with the 1.4 times buffer it had last time. However, a unilateral move is still seen as unlikely to succeed without US support. In September’s intervention, Japan spent almost $20 billion to limit the currency’s losses.

5. Is intervention a good idea?

While buying intervention is a clear way to tell speculators you won’t allow your currency to go into free fall, it’s only going to be a temporary fix unless economic fundamentals driving the trend are also addressed. In addition, foreign reserves are generally there to protect the economy in the event of a major financial shock or unexpected event, not to artificially prop up the currency.

6. Does Japan have to go it alone?

most likely. It was able to secure G-7 support for intervention to curb a strong yen after the 2011 tsunami and to support it during the Asian financial crisis. But things are different now. Its main partners generally don’t like countries to set or influence exchange rates and want market forces to do the work. The G-7 and Group of 20 — both of which include Japan — have agreements to that end in place. The yen’s current weakness is driven partly by a combination of continuing BOJ monetary stimulus and the Fed rate hikes. In that sense, it could be seen as a Japan-driven event, and that may weaken the case for action.

–With assistance from Yoshiaki Nohara.

More stories like this are available on bloomberg.com

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