Yen Soars as Japan Intervenes to Prop Up Currency 

Tokyo, Japan – The Japanese yen staged a dramatic rally against the U.S. dollar on Monday, with traders citing currency intervention by Japanese authorities as the trigger for the bounce in a yen that has been languishing at 34-year lows.

The dollar plummeted nearly 4% at one point to 154.40 yen from as high as 160.245 yen earlier in the trading session in Asia. Banking sources indicated that Japanese banks were seen aggressively selling dollars to buy yen on orders from the authorities.  

By late afternoon in New York, the U.S. currency had pared some of those gains but was still trading over 1% lower around 156.27 yen. The Wall Street Journal reported that Japanese financial authorities had indeed intervened in the foreign exchange market, citing people familiar with the matter.

Suspected Intervention to Stem Yen’s Slide

Traders had been on high alert for potential intervention from Tokyo for weeks as the yen continued its relentless downward spiral and broke through various psychological milestones. Despite the Bank of Japan’s historic move to exit negative interest rates last December, the yen has still lost over 11% versus the dollar in 2023 alone as it traded at levels last seen over three decades ago.

“Last night’s volatility comes after the central bank opted not to adjust its asset purchase volumes in last week’s decision, keeping rate differentials at spectacularly wide levels and leaving policymakers with few options to arrest the currency’s decline,” said Karl Schamotta, chief market strategist at Corpay.

He added that the yen’s breach above 160 per dollar clearly amounted to the kind of “disorderly” move that has previously prompted Japan’s Ministry of Finance to step in with yen-buying intervention.

Yen Weakened by Policy Divergence 

Currency traders have relentlessly sold yen in recent months as the policy divergence between the ultra-loose stance of the Bank of Japan and the aggressive interest rate hikes from the Federal Reserve has widened.  

Japanese government bonds offer paltry yields far below U.S. Treasury yields, drawing a constant flow of investment out of Japan into higher-returning foreign assets and putting incredible downward pressure on the yen.

“Over time with this interest differential between the BoJ and the Fed and the obvious reluctance of the BoJ to do anything about that…it’s tough to build up any momentum for the Japanese yen going the other way to strengthen,” said Joseph Trevisani, senior analyst at FXStreet in New York.

Japan’s top currency diplomat Masato Kanda declined to directly confirm whether intervention had taken place, but remarked that the current volatile yen moves were “speculative, rapid and abnormal” and could not be overlooked.

A Wake Up Call for More Action?

Currency analysts suggested Monday’s suspected intervention may be a pre-emptive move by Japanese officials to put a floor under the yen ahead of this week’s Federal Reserve policy decision. While no change in interest rates is expected, the Fed’s guidance on future rate hikes will be crucial for determining the yen’s path.

“Today’s move, if it represents intervention by the authorities, is unlikely to be a one-and-done move,” said Nicholas Chia, Asia macro strategist at Standard Chartered in Singapore. “We can likely expect more follow through from the Ministry of Finance if the dollar/yen pair travels to 160 again. In a sense, the 160-level represents the pain threshold, or new line in the sand for the authorities.”

A rapidly weakening yen has become a serious headache for Japanese policymakers. While it provides a competitive boost for the country’s exporters, it also increases import costs, adds to inflationary pressures, and squeezes Japanese households and businesses.

Limited Avenues to Stem Yen’s Slide

The Bank of Japan is not directly mandated to manage the currency’s value. But the yen’s sharp depreciation severely complicates its efforts to achieve its 2% inflation target in a sustainable manner through monetary policy alone.

The BOJ also has limited ability to dramatically raise interest rates and narrow the yield differential, driving yen weakness. Doing so could destabilize Japan’s heavily indebted government and economy that has been buoyed by years of rock-bottom borrowing costs.

BOJ Governor Kazuo Ueda reinforced this conundrum after last week’s policy meeting, stating that while the central bank does not directly target currency rates, excessive exchange rate volatility could have a significant negative economic impact.

Diminishing Policy Ammunition

For Japan’s Ministry of Finance, currency intervention is one of the few remaining policy levers to stem yen weakness and volatility in the short-term. Tokyo is estimated to have spent around $60 billion in unilateral dollar-selling, yen-buying intervention last fall when the pair briefly traded above 150 yen per dollar.

But analysts suggest that such unilateral interventions can only provide temporary respite for the yen if not backed up by an actual shift in the Bank of Japan’s monetary policy stance.

“A combination of the BOJ demonstrating urgency to normalize policy and the Ministry of Finance conducting FX intervention may perhaps be more effective than the MOF doing a solo act,” said Christopher Wong, a currency strategist at OCBC in Singapore.  

The United States, Japan and South Korea agreed earlier this month to “consult closely” on currency issues in a rare joint warning over exchange rate moves. But so far, neither the Federal Reserve nor the European Central Bank have commented directly on Monday’s intervention by Japan.

Yen’s Path Still Downward

Some currency market participants expect the yen’s overall downward trajectory is likely to persist unless the BOJ signals a more hawkish policy pivot or U.S. rates somehow peak and begin declining.

“Intervention usually reverses the price action for a few days/weeks, buying officials some time,” wrote analysts at TD Securities. “Still, it can’t offset global macro forces. We need lower US rates or a hawkish BoJ to meaningfully alter [the yen’s] fate.”

With few expecting any surprises from the Fed this week, yen bears may view Monday’s intervention as merely a temporary blockade that will soon be overwhelmed by the relentless tide of yield-seeking capital continuing to flow out of Japan.

At the same time, the Ministry of Finance has clearly shown its determination to prevent any further yen slides that could morph into a domestically destabilizing currency crash. The stage is set for more intervention fireworks if the yen resumes plumbing fresh multi-decade lows against the dollar and other major peers.