Currency traders are increasingly alert to the risk of further market intervention by Japan following a 1% slide in the yen this week that has pushed it to 158 per dollar.
The yen has now retraced more than half of the gains triggered by multiple rounds of intervention in the period from April 30 through Japan’s Golden Week holidays. It traded at 158.55 as of 11:01 a.m. in Tokyo on Friday, putting it on track for its biggest weekly loss in two months.
Elevated oil prices, broad dollar strength and the Iran conflict continue to weigh on the yen, along with the impact of Japan’s wide interest-rate gap with the US. Given that there is little prospect of an early end to tension in the Middle East, and that the Bank of Japan won’t decide on interest rates again until mid June, market intervention looms as the obvious tool for authorities to use to stem yen weakness.
“Persistent JPY intervention risks will be a feature” of the Ministry of Finance’s policy, said Vishnu Varathan, head of macro research, Asia ex-Japan at Mizuho Securities. “As of now, 160 USD/JPY is the presumed initial line in the sand. But the greater priority is to ensure sands in the bearish JPY wheels.”
While Japan has continued to decline to comment directly on whether it intervened to prop up the yen, people familiar with the matter have said authorities came into the market on April 30. Analysis of the central bank’s accounts indicates likely intervention of around as much as ¥10 trillion yen ($63 billion) from then through to the end of Japan’s Golden Week holidays on May 6.
Back in 2024, authorities spent around $100 billion in buying yen several times after the currency tumbled to about 160.17 to a dollar. Additional steps were taken on days when the yen reached 157.99, 161.76 and 159.45. The bouts of intervention helped bring temporary relief before the yen resumed its weakening trend.
Bank of Japan board member Kazuyuki Masu on Thursday called for interest rates to be increased as soon as possible, provided there is no indication of the economy running into trouble, citing more enduring inflationary risks from the war in Iran.
Overnight index swaps imply traders are pricing in a 77% chance of a June rate hike. At the same time, one-month dollar-yen risk reversals remain skewed toward yen calls, suggesting markets are still wary of further intervention.
The threat of Japan wading into the market is for now reducing the likelihood of dollar-yen going to 160, according to Vincent Chung, a portfolio manager at T. Rowe Price.
“The effectiveness of further intervention will likely be determined by whether there is dollar weakness as well,” he said. “An accelerated hiking cycle for BOJ would also help close the interest rate differential gap.”
Posted by Otherwise_Young52201
1 Comment
As mentioned in the article, this slide is happening despite the fact that there was an intervention to the tune of around $63 billion. Going forward, the Ministry of Finance will probably need to intervene more in order to keep the yen at a constant level versus the dollar.
Some further notes on this:
1. Traders are likely cautious about shorting the yen against the dollar past 160, as the Ministry of Finance is likely to intervene if it touches close to that point, especially considering the psychological barrier.
2. Japanese financial institutions are booking massive profit every time they intervene with the yen at this stage. Given that much of the gross debt taken out was from a time where the JPY/USD ratio was much lower, there are possibly making profit margins of up to 100% per intervention.
3. Bessent previously endorsed such intervention moves. Not sure if Japan and the US will coordinate a response together, but it is definitely a possibility.