Japan's approach to currency intervention

In August, a former central bank official suggested that Japan would abstain from interfering in the currency market unless the yen’s value fell below 150 against the dollar, posing a considerable political challenge for Prime Minister Fumio Kishida. Decisions regarding intervention have always carried significant political weight in Japan, with the Prime Minister ultimately responsible for the call. According to Takeuchi, an analyst, authorities might issue verbal warnings and conduct rate assessments as a preliminary step, hoping that market forces would stabilise the yen.

Japanese law grants the government authority over currency policy, with the Ministry of Finance determining the timing of interventions, while the Bank of Japan acts as its agent.

As of the most recent update, the USDJPY exchange rate stands at 149.80.

In September, US Treasury Secretary Janet Yellen gave the green light for intervention; she expressed that Japan’s intervention to stabilise the yen would be acceptable if its purpose were to alleviate market volatility rather than to dictate the exchange rate’s level.

In early October, Finance Minister Shunichi Suzuki confirmed that the Japanese government was prepared to take action if the yen’s depreciation was overly abrupt, emphasising that the focus was on volatility, not specific exchange rate levels.

On 14 October 2023, Sanjaya Panth, Deputy Director of the IMF’s Asia and Pacific Department, noted that the yen’s recent decline stemmed from fundamental factors and did not meet the criteria necessitating government intervention.

However, on 16 October 2023, Masato Kanda, Vice Finance Minister for International Affairs at Japan’s Ministry of Finance (MOF), refrained from commenting when asked about the IMF’s stance that Japan still needed to meet the prerequisites for currency intervention. Kanda emphasised that various factors influenced currency rates, and long-term interest rates were just one component. He stated that the situation was fluid, and the potential impact of rising oil prices on Japan’s economy remained uncertain.

Assess the possible impact of the intervention

In July, a report from the Bank for International Settlements (BIS) highlighted that the yen had functioned as a key global credit currency since 2021 due to its low interest-rate status. It had accumulated a significant share of global credit growth even amid the Federal Reserve’s tightening monetary policies.

Notably, the latest data shows that large speculators have held the largest short position on the yen since 2021, increasing the risk of a short squeeze if the Bank of Japan (BOJ) intervenes in the currency market.

Examining the weekly chart, there’s a notable potential for yen devaluation should it surpass the 160 level. Consequently, the Bank of Japan intends to intervene when USDJPY is between 150 and 160. Presently, the Stochastic indicator is in an overbought zone, suggesting a possible correction for USDJPY.