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Japan Ramps Up Yen Intervention Warning After BOJ-Fueled Selloff

by Hataf Finance
5 minutes read

(Bloomberg) — Traders are piling into fresh bets against the yen, triggering pushback from Japanese authorities who are threatening once again to take action including the possibility of currency intervention.

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The yen edged away from a year-to-date low Wednesday after Masato Kanda, Japan’s top currency official at the finance ministry, said authorities are ready to act if needed.

“We’re on standby,” Kanda told reporters, echoing language he used a year ago on the day Japan made the first of three forays into the market. “But I can’t say what we’ll do, and when — we’ll make judgments overall, and we’re making judgments in a state of urgency.”

The currency posted its biggest one-day drop since April on Tuesday after the Bank of Japan’s underwhelming tweak to its cap on bond yields suggested any move away from ultra-loose policy would be slow and gradual.

The yen strengthened after Kanda’s and held a gain of about 0.3% at 151.27 per dollar as of 1:47 p.m. in Tokyo. It slumped 1.7% on Tuesday.

Despite Wednesday’s intraday relief for the yen, its longer-term slide toward 152 has the currency around the threshold that a year ago drove Japanese authorities to swoop in to prop it up. The movement of well over two yen in less than a day fits in with the extent of volatility that triggered Japan to spend more than $60 billion buying the currency in markets last year. The yen also weakened to the lowest since 2008 against the euro on Tuesday.

“We’re very concerned about one-sided, sudden moves in currencies,” Kanda said in the morning. “Fundamentals don’t move several yen in one night.”

He followed up with second round of comments around midday in which he said speculation had been the biggest factor in recent moves in the currency.

Finance ministry figures released on Tuesday showed no money was spent on intervention in the currency market between Sept. 28 and Oct. 27. The period includes Oct. 3, when the yen’s decline to 150.16 suddenly reversed to 147.43, a move that had sparked discussion in markets that Japan may have intervened.

Meanwhile, Japanese government bond yields were edging higher Wednesday, while their US counterparts were fractionally lower, giving mild support to the yen. While the central bank announced an unscheduled bond-purchase operation in the afternoon to tamp down yields, it had only minimal impact in the debt and currency markets.

Traders were showing little fear that Japan will start buying the yen to halt its slide. Speculative US dollar calls pointed to mounting wagers on the yen’s weakness, while leveraged funds were seen adding to shorts following the BOJ meeting.

“The Bank of Japan underwhelmed yet again,” said Saxo Bank market strategist Charu Chanana. “The yen bears returned and with 150 no longer being a line in the sand for USD/JPY, we could see 152 getting tested,” she said, noting that it could even hit 155.

The BOJ on Tuesday loosened its grip on bond yields, saying that the 1% effective ceiling on 10-year government debt is now seen as a reference point.

But it remains the world’s last significant holdout to the hawkish tack taken by other major central banks, leaving bond yields there trading well below those in the US and Europe. That’s exerting a steady downward pull on the yen as Japanese investors shift cash elsewhere to capture higher yields.

Absent any direct intervention, foreign-exchange traders and strategists said that a more substantive monetary policy shift — and a narrowing of the difference in yields between the US and Japan — will be required to halt the yen’s slide. It’s fallen over 13% against the dollar this year after a similar sized decline in 2022.

The BOJ’s decision “may not be enough to set it on an appreciation path,” said Aninda Mitra, a macro and investment strategist at BNY Mellon Investment Management in Singapore. “For that to happen, a dovish pivot from the Fed may also now be needed.”

The dollar pared a recent run of losses on Tuesday and a gauge of greenback strength remained up ahead of the conclusion of the Federal Reserve’s meeting Wednesday afternoon. It’s widely expected to keep interest rates steady while underscoring its commitment to holding monetary policy tight until the risk of inflation recedes.

Some investors said that the yen’s slide may ultimately prod the BOJ to tighten its monetary policy more aggressively. Eventually, such a shift would likely strengthen the currency off recent levels, though there’s no sign of that happening soon.

“Given the recent weakening of the yen, even after the Bank of Japan adjusted its yield curve control, and Japan’s reliance on commodity imports, it would not surprise us to see the BOJ abandon YCC altogether in 2024,” said Spencer Hakimian, chief executive officer of Tolou Capital Management. “Hence, we see value in the yen at these levels.”

–With assistance from George Lei, Robert Fullem, Masaki Kondo, Emi Urabe and Carter Johnson.

(Updates with BOJ’s unscheduled bond-purchase operation.)

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