By Leika Kihara
TOKYO (Reuters) – Japanese authorities are facing renewed pressure to stem a continued depreciation in the yen, as traders lower the currency on expectations of further interest rate hikes by the central bank in the near term.
Below are details on how the yen buying intervention works:
LATEST CONFIRMED YEN BUYING INTERVENTION?
Japan bought the yen in September 2022, the market’s first attempt to boost its currency since 1998, after a decision by the Bank of Japan (BOJ) to maintain its ultra-loose monetary policy sent the yen to a record low of 145 per dollar. It intervened again in October after the yen fell to a 32-year low of 151.94.
WHY GET IN?
Intervention in buying the yen is rare. Far more often, the Treasury Department has sold the yen to prevent its rise from hurting the export-dependent economy by making Japanese goods less competitive abroad.
But the yen’s weakness is now seen as problematic as Japanese companies have moved production abroad and the economy is heavily dependent on imports of goods ranging from fuel and raw materials to machine parts.
WHAT HAPPENS FIRST?
When Japanese authorities escalate their verbal warnings and say they are “ready to take decisive action” against speculative actions, it is a sign that an intervention is imminent.
The BOJ’s interest rate monitoring – when central bank officials call dealers and ask for the buying or selling rate for the yen – is seen by traders as a possible precursor to intervention.
WHAT HAS HAPPENED SO FAR?
Finance Minister Shunichi Suzuki told reporters on March 27 that authorities could take “decisive steps” against the yen’s weakness – language he has not used since the 2022 intervention.
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Hours later, Japanese authorities held an emergency meeting to discuss the weak yen. The meeting is usually held as a symbolic gesture to the markets that authorities are concerned about rapid currency movements.
After the warnings failed to stop the yen’s fall, South Korea and Japan received recognition from the United States at a trilateral meeting held in Washington last week over their “serious concerns” about their currencies’ decline.
The market impact of the agreement did not last long. The dollar continued its rise and hit a 34-year high of 155.74 yen on Thursday, moving past the 155 level seen as authorities’ line for intervention.
NEXT LINE IN THE SAND?
Authorities say they are looking at the speed of the yen’s decline, rather than its levels, and whether the moves are driven by speculators, to determine whether to enter the currency market.
Although the dollar has moved above psychologically important levels, the recent rise has been gradual and mainly driven by interest rate differentials between the US and Japan. That could make it difficult for Japan to argue that the yen’s recent decline is inconsistent with fundamentals and warrants intervention.
Some market players are betting that the Japanese authorities’ next step in the sand could be 160. Takao Ochi, director of the ruling party, told Reuters that the yen’s fall to 160 or 170 against the dollar could spur policymakers into action.
WHAT IS THE TRIGGER?
The decision is highly political. When public anger over the weak yen and a subsequent rise in the cost of living is high, it puts pressure on the government to respond. This was the case when Tokyo intervened in 2022.
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Prime Minister Fumio Kishida may feel the need to prevent the yen from falling further as the cost of living rises, as his approval ratings falter ahead of the ruling party’s leadership race in September.
But the decision wouldn’t be easy. Intervention is costly and could easily fail, as even a large burst of yen purchasing would pale next to the $7.5 trillion that changes hands daily in the foreign exchange market.
HOW WOULD IT WORK?
When Japan intervenes to counter the yen’s rise, the Treasury Department issues short-term notes, appreciates the yen, and then sells them to weaken the Japanese currency.
To support the yen, however, authorities must tap Japan’s foreign reserves for dollars, which they can then sell against the yen.
In both cases, the Minister of Finance issues the order to intervene and the BOJ executes the order as an agent of the ministry.
CHALLENGES?
The Japanese authorities consider it important to seek the support of the Group of Seven partners, especially the United States, if the intervention concerns the dollar.
Washington gave tacit approval when Japan intervened in 2022, reflecting recent close bilateral ties.
Finance Minister Suzuki said last week’s meeting with his U.S. and South Korean counterparts laid the groundwork to act against excessive yen moves, a sign that Tokyo saw the meeting as an informal consent from Washington to intervene grab if necessary.
US Treasury Secretary Janet Yellen said currency interventions should only take place in “very rare and exceptional circumstances”, when markets are disordered and there is excessive volatility. She declined to comment on the value of the yen.
A looming U.S. presidential election could complicate Japan’s decision on whether and when to intervene.
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In a post on social media on Tuesday, Republican presidential candidate Donald Trump denounced the yen’s historic decline against the dollar, calling it a “total disaster” for the United States.
There is no guarantee that an intervention can effectively stem the yen’s weak tide, which is largely driven by expectations of prolonged low interest rates in Japan. BOJ Governor Kazuo Ueda has dropped hints for another rate hike, but stressed the bank will be cautious given Japan’s fragile economy.
