Japan forced to support the yen after the bank kept negative interest rates | coins

Japan intervened to support the yen for the first time since 1998, after it reached a 24-year low as the central bank resisted the trend of raising interest rates.

Tokyo was forced to take action in the foreign exchange market to support its weak currency, after the Bank of Japan (BoJ) maintained its ultra-loose monetary policy on Thursday.

The Japanese government sold the US dollar after the yen fell past the 145 barrier against the dollar, on the back of the Bank of Japan’s decision to leave its record rates in negative territory, on a day when other central banks increased borrowing costs in an attempt to cool inflation. .

Japan’s Deputy Finance Minister for International Affairs, Masato Kanda, told reporters that the government had “taken decisive measures” to address the sudden drop in the yen in the foreign exchange market.

The intervention, which lifted the yen by 2% against the dollar to 141.2, showed that Tokyo lost patience with the currency’s steady slide and highlighted the impact of a stronger US dollar on major economies.

Prime Minister Fumio Kishida said that Japan will respond decisively to excessive volatility in the currency market.

However, analysts warned that the intervention could be ineffective as long as the Bank of Japan maintains its ultra-low interest rate policy while other central banks are tightening.

“The timing of that was very bad,” said Fouad Razakzadeh, market analyst at City Index and Forex.com. “More importantly, will the Bank of Japan back down from the government’s attempt to support the yen?”

The dollar hit a new 20-year high against a basket of currencies before Tokyo’s intervention, after the Federal Reserve raised US interest rates by 0.75 percentage points on Wednesday, its third increase of 75 basis points in a row.

The US currency has strengthened steadily this year, in part because US interest rates are rising faster than other countries. Concerns about a weak global economy with rising inflation pushed traders to the safe haven of the dollar, sending the euro to a 20-year low, and the pound to its weakest point in 37 years.

James Athey, Abrdn’s chief investment officer, explained that the two biggest drivers of dollar strength are often described as the “dollar smile.”

“On the one hand, there is the Fed’s policy tightening, and on the other hand is risk aversion – after all, the US dollar is the world’s reserve currency. In the past 18 months or so, both parties of the smile have been running in the field,” Athey added. same time.

A batch of other central bank announcements added to the volatility in the markets on Thursday.

The Bank of England raised its policy rate by another half a point, to a 14-year high, while the Swiss Central Bank raised its key policy rate from negative territory for the first time since 2014, with a 75 basis point rise. The increase, from minus 0.25% to 0.5%, weakened the Swiss franc, as traders expected a full percentage point increase.

Norges Bank raised borrowing costs by half a point. It forecast a gradual increase of 25 basis points at its next meeting, weakening the Norwegian crown.

However, the Central Bank of the Republic of Turkey surprised the markets by lowering borrowing costs by a percentage point from 13% to 12%, even though Turkish inflation reached 80% in August. The sudden devaluation sent the Turkish lira to a new record low, adding to the hawkish Federal Reserve’s pressure on emerging market currencies.

Tunisia’s central bank has steadily cut interest rates over the past year, from 19% last summer, despite warnings that the move would hurt the currency and lead to higher inflation.

“You have to wonder what it would take for CBRT to accept that its trial – at the worst possible time – failed but we are clearly not nearly at that point. It looks like more pain is going to come,” said Craig Erlam, chief market analyst at OANDA.

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