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Japan’s historic intervention fails to change the forces undermining the yen

Japan’s first market intervention in more than two decades to boost the yen halted the currency’s steady decline. What it has not done is change the growing deficit in global monetary policy that is driving the decline.

That means that the impact may be relatively short-lived as long as the Bank of Japan remains the darling of the world’s central banks. The yen’s nearly 20% fall against the US dollar this year is largely due to its policy of keeping interest rates low while others raise them strongly against inflation.

This week, the BOJ pulled back even further, reiterating its policy of capping yields just as the Federal Reserve enacted its third straight quarter percentage point rate hike. Banks from Indonesia to the UK continued to tighten policies. Switzerland did too, ending an era of negative interest rates in Europe.

The net effect has been a drag on the yen, as investors move cash elsewhere to take advantage of interest rates that are much higher than those in Japan. And unless that changes, analysts see little chance of the currency rebounding against the US dollar.

The “intervention goes against the actions of the Fed and the BOJ,” said Mark Sobel, a former US Treasury Department official who is now chairman of the Official Forum of US Monetary and Financial Institutions, a financial group. experts. “So overall, expect it to have a very short-term impact.”

That effect of the Finance Ministry’s move was evident in currency markets on Thursday, where the yen rose as much as 2.6% to just over 140 per dollar. It had fallen to 145.90, the lowest level since 1998.

The US Treasury and the European Central Bank said they were not involved in the intervention. And while the MoF purchases could keep the yen trading in a range, downward pressure on the currency could intensify if US inflation remains high and the Fed pursues a more aggressive stance.

“Although intervention may not be enough, they have hit the brakes,” said Stephen Jen, chief executive of London hedge fund Eurizon SLJ Capital Ltd. He said the move can keep the yen below 150. Bring the market down and control the market at 145. They are showing their dissatisfaction, even though the Fed and BOJ are going in opposite directions.”

Historically, Japan has intervened much more often to prevent the yen from appreciating too much, putting risks to its export industries. The largest purchase of yen occurred in April 1998, when the BOJ bought 2.8 trillion yen ($20 billion) in the foreign exchange market.

But that didn’t immediately stop the yen’s slide and it didn’t bottom out until that August. He quickly began to realize only after the Russian debt default and the collapse of the hedge fund Long-Term Capital Management Chaos in the financial markets, forcing investors to cancel trades that depended on borrowing yen and invest to do in other places. By the end of December, the yen had risen 30% against the dollar from its lows.

However, unlike in 1998, the yen’s weakness is not driven by carry trade speculators, who borrow yen and sell it to invest the profits elsewhere. In fact, leveraged funds have short bets on the yen 35% below the level in mid-April when the yen traded around 125 to the dollar, according to data compiled by the Commodity Futures Trading Commission.

Instead, Japan’s policy divergence and rapidly deteriorating trade situation – thanks to high energy prices – are to blame for the yen’s depreciation. In August, the trade deficit in Japan, a net energy importer, hit a record high, meaning the country was flooding global markets with yen to pay for goods.

Of course, the significant pool of reserves that Japan can use on the forex markets is likely to discourage any trader looking to bet against the currency. Japan had $1.17 trillion in reserves at the end of August, compared with an average daily Tokyo yen transaction volume of about $479 billion.

That reserve may be large enough to help propel the currency through the end of the Fed’s tightening cycle, which swap traders see coming in early to mid-2023.

Here’s what the strategists had to say:

Jens Nordvig, founder of New York-based research firm Exante Data

“We believe that the Ministry of Finance/Bank of Japan is working to keep the yen dollar rate below 145 for a period. But we don’t think the intervention will result in a much lower dollar-yen rate. So, we could be in the 140-145 range for a while. But a hawkish Fed and weak global growth is a powerful combination to continue supporting the dollar.”

Chris Turner, head of currency strategy at ING in London

“Obviously investors will think twice about paying USD/JPY above 145 now. And it can be argued that we will now enter a volatile trading range of 140-145. But expect investors to be willing to buy dollars on declines near 140/141 knowing that it will be impossible for Tokyo to turn this strong dollar tide, a tide that would keep the dollar supported for the rest of this year.”

Steven Englander, Group 10 head of FX research at Standard Chartered Bank

“I think they’re very happy so far: market talk doesn’t suggest they’ve overspent and the US dollar/yen exchange rate is down a significant 4 figures. They made progress on the market even though everyone was discussing the risk of intervention. If I were them, I’d flush again and again in New York to see if they can get below 140.”

George Saravelos, Global Head of FX Research, Deutsche Bank

“As we have argued for a long time, it is not credible that a central bank is debasing its currency through large amounts of QE while the authorities seek a stronger exchange rate at the same time. When Japan last intervened to protect the currency in 1998, the interest rate differential between the US and Japan narrowed instead of rising sharply, as it does today. That the intervention was unilateral and that it took place on the same day when a moderate meeting of the Bank of Japan spoke of the great internal contradictions”.

Michael Metcalfe, jefe de macrostrategia, State Street Global Markets

“If previous intervention periods are any guide, repeated action is likely to be taken to prevent further JPY weakness, especially given the BOJ’s decision to maintain control over the yield curve. Other central banks will also be watching the action closely, particularly in Europe, where currency devaluations of more than 20% inadvertently add to inflationary pressures.

At the moment, a more coordinated intervention to weaken the USD may be inconsistent with the US authorities’ desire to tighten financial conditions. However, once US interest rates peak early next year, a weaker USD could benefit all G7 members; Watch for bookings at the Plaza Hotel in New York in the first quarter of 2023.”

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