Japan stepped in to support the yen for the first time since 1998, as it seeks to stem a 20% decline against the dollar this year amid growing policy divergence with the United States.
The yen rose 2.3% against the dollar, retreating sharply from today’s lows when it broke through the key psychological level at 145, as senior currency official Masato Kanda said the government is taking “bold action”.
The intervention came after the BoJ insisted that it would maintain its negative interest rate policy even as the Federal Reserve rose strongly, and points to how the pain threshold was reached as hedge funds continued to increase short bets on the yen. The question now is whether the unilateral measure will succeed.
“At best, their action could help slow the pace of the yen’s decline,” said Christopher Wong, currency analyst at Oversea-Chinese Banking. “This move alone is unlikely to change the underlying trend unless the dollar turns, US Treasury yields lower or lower. The Bank of Japan adjusts its monetary policy.
Currency intervention is an unusual move for a country that has long been criticized by trading partners for tolerating or even encouraging a weak currency to benefit its exporters. The last time Japan strengthened the yen through direct intervention was during the Asian financial crisis in 1998, when the exchange rate reached around 146 and threatened the fragile economy.
It also previously intervened at levels around 130 to weaken the currency in 2011.
The dollar fell to the level of 140 yen simultaneously after the intervention, and fell by about 5 yen from 145.90 yen.
Kanda had described the moves against the currency as surprising and biased when he announced the intervention.
The Japanese authorities have reinforced verbal warnings in recent weeks, and the Bank of Japan conducted the so-called price check in the foreign exchange market the last step to warn against speculative bets.
On Thursday, Bank of Japan Governor Haruhiko Kuroda and fellow board members kept the Bank of Japan’s yield curve control program and its asset purchases on Thursday as widely expected. The central bank chief later said in a briefing that there may be no need to change future guidance for two or three years, and there is no prospect of a rate hike in the near term.
The yen is the worst performer among the G10 currencies. Japanese companies and households are increasingly talking about the negative effects of a weaker currency, with rising input and energy costs. Further slippage will put pressure on the consensus between a central bank determined to stoke inflation and a government desperate to avoid a cost-of-living crisis.
“For now, we could see some pullback from the yen selling, especially if the BoJ continues to intervene in the market on behalf of the Ministry of Finance during early next week,” said Jian Hui Tan, strategic analyst at Informa Global Markets. What you are probably doing is buying Japan for a while, hoping that the broad strength of the US dollar will ease somewhat and that any further depreciation of the yen can slow down.”
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