According to media reports and Bloomberg article published on October 13, 2022, the yen is back in prime intervention territory and analysts are debating whether its decline is extreme enough for Japanese authorities to prop up the currency as they did last month.
The currency fell to 146.39 per US dollar, surpassing the level that prompted Japan’s first intervention to buy the yen since 1998.
With Japan’s Finance Minister Shunichi Suzuki and Foreign Minister Masato Kanda in Washington for the Group of 20 and other meetings, the government’s chief spokesperson, Hirokazu Matsuno, was asked about the yen during a regular press conference yesterday.
“We’ll continue to monitor moves in the foreign exchange market with a sense of urgency,” said Matsuno, repeating recent remarks from senior officials on the yen. “We’ll take appropriate responses against excessive moves.”
The yen has slumped to a 24-year low this year as traders focused on the widening yield gap between the United States and Japan, with the former hiking rates aggressively and the latter keeping them at rock bottom levels to boost a sluggish economy.
This encourages investors to seek out more appealing returns in US dollar assets, such as money market instruments and fixed-income securities, as opposed to Japanese assets.
Traders will be looking at the 1998 high of 147.66 as the next key target, though strategists have said authorities won’t necessarily have a line in the sand at which they’ll intervene again and are likely focusing on the speed of declines.
The Finance Ministry spent 2.84 trillion yen (US$19.6bil) in September to limit the yen’s losses.
“There is so much tension that the duration time will be short,” said Yoshio Iguchi, managing director of Traders Securities in Tokyo.
“The chicken race will continue with people wanting to test the upside but at the same time scared of being countered by intervention.”
Despite the efforts of authorities, the Bank of Japan’s (BoJ) easy monetary policy continues to weigh on the currency.
Businesses have warned about the negative impact on the domestic economy, and households are bracing for a cost-of-living crisis should inflation take off.
Meanwhile, a selloff in treasuries this week has helped push the US dollar higher, increasing the pressure.
“With treasury yields seemingly heading back above 4% at 10-years, the US dollar generally bids on risk aversion and with Japanese Prime Minister Kishida yesterday fully endorsing BoJ governor Haruhiko Kuroda and the bank’s policy,” said Ray Attrill, head of foreign exchange strategy at National Australia Bank Ltd.
“But if we see a rapid move up from here as we are just now seeing, then we may see another burst of intervention.”
Still, evidence for the Japanese government’s reasoning behind stepping into the market last month looks less compelling at the moment.
One-week historical volatility in the dollar-yen has fallen to its lowest since March, indicating recent moves are far from extreme.
“Tokyo is unlikely to surrender so easily to the market, but the line of defence could be moved higher in response to the broad dollar uptrend,” said Alvin Tan, head of Asia foreign exchange strategy at Royal Bank of Canada in Singapore.
Markets are expecting the US Federal Reserve to continue with its most aggressive monetary policy tightening in decades, especially with recent data showing continued strength in the labour market.
Tomorrow’s US inflation report is the next key catalyst for investors.
