Behind the "roller coaster" volatility of the yen during the golden week: the Bank of Japan is suspected of intervening three times in a week

CBN

2024-05-05 16:27Posted on the official account of Shanghai Yicai

In this May Day Golden Week, in the face of the previous decline of the yen, the Bank of Japan did not "lie flat".

Since the end of April, the yen has been volatile in the foreign exchange market. The yen had fallen below 160 against the dollar at one point, but had rebounded to 152.75 on May 3, up 3.5% in a single week, a 17-month high. Regarding the sharp rise of the yen in a short period of time, both Japanese Prime Minister Fumio Kishida and the highest-ranking official in charge of Japan's foreign exchange affairs, Masato Kanda, expressed "noncommittal" on whether the Japanese government and the central bank will "save the yen".

The latest announcement on the BOJ's website on May 2 showed that its current account could fall by 4.36 trillion yen on May 7 (the Japanese market is closed for public holidays on May 3 and 6) due to fiscal factors.

This latest announcement from the Bank of Japan is intriguing. Combined with the sharp fluctuations of the yen in the foreign exchange market during the week from April 29 to May 4, what is really going on behind the ups and downs of the yen?

The Bank of Japan is suspected of intervening three times

In this round of yen exchange rate fluctuations, market participants speculated based on Bank of Japan statistics that the Bank of Japan's first intervention may appear on April 29, with a scale of about 5.5 trillion yen. After the intervention, the yen surged to 153.04 yen against the dollar in a matter of minutes from around 157.58 yen at the time in late US trading overnight. At that time, some traders speculated that the Japanese government and the central bank may have intervened.

The second intervention by the Bank of Japan is thought to have occurred on May 2, and the size of the intervention may be 3.5 trillion yen. But after these two suspected interventions, the yen's strength in the foreign exchange market did not last long. During the Asian trading session on May 2, the yen fell as much as 1.1% against the US dollar to 156.28 yen, further approaching the pre-intervention level.

On May 3, the Bank of Japan (BOJ) was suspected of coming out again, bringing the yen back within 153 against the US dollar. As a result, the yen rose nearly 3.5% against the dollar for the week, its biggest weekly gain in 17 months.

The last time the Japanese government and central bank intervened in the exchange rate was in September and October 2022, when the Ministry of Finance spent about 9.2 trillion yen (about 60.6 billion U.S. dollars) to support the yen exchange rate three times. At that time, the yen fell to 151.95 yen per dollar. The effect of the intervention was immediate, and in the last two months of 2022, the yen rose from 151 yen per dollar to around 127 yen. However, as the Federal Reserve continues to raise interest rates here and the Bank of Japan continues to have an ultra-loose monetary policy, the yen is going further and further down the road of depreciation.

At present, the Japanese government and the central bank continue to maintain a "sense of mystery" about foreign exchange intervention, and do not admit foreign exchange intervention operations, and the relevant data is only the result of market analysis. However, the Japanese government publishes data on foreign exchange intervention every month. The relevant data for April will be released at 6 p.m. on April 30. However, monthly announcements typically do not include data for the last few working days of the month. Therefore, whether the Japanese government and the central bank will intervene again after a year and a half, and the exact scale of the intervention, will be revealed at the end of May. At that time, the Ministry of Finance will announce the total amount of funds used to intervene in the foreign exchange market from April 26 to May 29.

Warning of the risk of intervention

As for whether the Japanese government and the central bank will intervene, experts interviewed by Yicai believe that even if the government intervenes, it will not be able to fundamentally reverse the decline of the yen in the foreign exchange market. Chen Yan, president of the Japan Enterprise (China) Research Institute, told Yicai: "The effect (of intervention) is also temporary, after all, the scale of the yen that the government can come up with is limited, and it will eventually be diluted in the huge foreign exchange market, so it is impossible to maintain the long-term upward trend of the yen through intervention." ”

Chen Yan told Yicai, "In the 'Abenomics' that has a far-reaching impact on the current Japanese economy, the depreciation of the yen occupies an important position. This policy continues to this day, even as the Bank of Japan changes hands and enters the Ueda era. In addition to the "national policy" that the Japanese government has adhered to for more than 10 years, Chen Yan also believes that the depreciation of the yen is in line with the interests of large Japanese enterprises, especially large enterprises that are actively deploying overseas, "For Japan, it has enough products on hand to sell abroad, and it can increase the efficiency of enterprises by expanding the sales of products, and to a considerable extent, because of the depreciation of the currency, strengthen the export of domestic products, so that the depreciation can increase the vitality of enterprises, enrich stock prices, and make the financial foundation more solid." ”

Koji Fukaya, a researcher at Tokyo Market Risk Consulting, agrees: "The government's intervention is intended to send a warning that the yen will not be allowed to fall freely. However, it is difficult to expect the yen to reverse its decline. This is not only the view of investors and traders, but also of ordinary Japanese people. ”

According to the latest report from JPMorgan Chase & Co.'s Japan Market Research Division, as of the end of March 2024, there were about $994 billion in "securities" and $155 billion in "deposits" in Japan's official foreign exchange reserves. In theory, the Japan Monetary Fund could use all of its foreign exchange reserves to intervene, but in practice it is unlikely that this will happen.

Moreover, JPMorgan Chase & Co. said that in the foreign exchange commitments previously agreed by the G7 countries, foreign exchange intervention is only a special action, which is only used to deal with excessive market volatility in the short term.

Regarding the volatility of the yen, on April 26, the current US Treasury Secretary Janet Yellen deftly responded to the question of "if Japan intervenes in the foreign exchange market". Yellen said, "Market adjustment of the exchange rate is one of the ways in which countries can have different policies." For those countries that have a decisive influence on the foreign exchange market, intervention should only be carried out in extremely rare cases. She also stressed that the U.S. wants these situations to happen rarely, only when there is excessive volatility, and that they can come in early for advice.

On May 4, former U.S. Treasury Secretary Summers said that monetary intervention was ineffective in changing the exchange rate, even with Japan's recent large-scale interventions. "Given the sheer size of the capital markets, I think the evidence is quite clear that intervention doesn't work – even given the scale of Japan's intervention," he said. At the same time, Summers said the yen has become stretched.

Bank of America's latest research report also mentions the yen's recent volatility. BofA believes that in the long run, the BOJ's intervention will take more and longer than in 2022 to defend the yen, as the carry trade and Japan's structural deficit continue to exert upward pressure on the yen against the dollar until the Fed starts cutting interest rates, and in the short term, if the BOJ intervenes more than 10 trillion yen (about $65 billion), it is estimated to be negative for the yen, because it means a rapid decline in foreign exchange reserves.

(This article is from Yicai)

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