Japan intervenes in the foreign exchange market to stop the yen’s decline after the Bank of Japan kept rates very low

Japan intervenes in the foreign exchange market to stop the yen's decline after the Bank of Japan kept rates very low

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  • Bank of Japan maintains very low rates, pessimistic policy guidance
  • A Japanese foreign exchange diplomat said he had taken “decisive” action.
  • Confirmation of intervention pushes the dollar to slide more than 2%
  • Analysts doubt Tokyo’s ability to continue supporting the yen

TOKYO (Reuters) – Japan intervened in the foreign exchange market on Thursday to buy the yen for the first time since 1998 in a bid to prop up a battered currency after the Bank of Japan suspended ultra-low interest rates.

The move sent the dollar down more than 2% to around 140.3 yen, after trading above 1% earlier on the Bank of Japan’s decision to stick to its ultra-loose policy stance, countering the global tide of monetary tightening by central banks fighting high inflation.

Later, USD/JPY pared its losses and fell about 1% to 142.76 by 1043 GMT.

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“We have taken decisive measures (in the exchange market),” Deputy Finance Minister for International Affairs Masato Kanda told reporters.

However, analysts questioned whether the move would halt the yen’s prolonged decline. The currency has fallen about 20% this year, dropping to its lowest level in 24 years, largely as violent increases in US interest rates pushed the dollar higher.

“The market was expecting some intervention at some point, given the increased verbal interventions we’ve been hearing over the past few weeks,” said Stuart Cole, chief macro economist at Equiti Capital in London.

“But currency intervention is seldom successful and I expect today’s move will only provide a temporary respite (for the yen).”

Finance Minister Shunichi Suzuki declined to reveal how much the authorities spent on buying the yen and whether other countries had agreed to the move.

Kanda, who joined Suzuki at the press conference, said Japan had “good contacts” with the United States, but declined to say whether Washington had agreed to Tokyo’s intervention.

As a protocol, currency intervention requires informal approval by Japan’s G7 counterparts, particularly the United States, if it is to be conducted against the dollar/yen.

Confirmation of the intervention came hours after the Bank of Japan decided to keep interest rates near zero to support the country’s fragile economic recovery, a position many analysts believe is increasingly untenable given the global shift to higher borrowing costs.

Bank of Japan Governor Haruhiko Kuroda told reporters that the central bank may hold off on raising interest rates or change its pessimistic policy direction for years.

After the monetary policy decision, Kuroda said, “There is absolutely no change in our stance of maintaining easy monetary policy for now. We will not raise interest rates for some time.”

The BOJ’s decision came after the US Federal Reserve introduced its third consecutive interest rate increase of 75 basis points on Wednesday and signaled more massive hikes ahead, underlining its determination to not let up in its fight against inflation and give more support to the dollar. Read more

Japan has also become more isolated among major economies in keeping short-term interest rates in negative territory after the Swiss National Bank on Thursday raised its benchmark interest rate by 0.75% points, ending years of negative rates aimed at taming its currency’s rally. Read more

SNB President Thomas Jordan said at a press briefing that his bank had not been involved in any coordinated actions to support the yen.

Another resort weapon

With the Bank of Japan ruling out a near-term interest rate hike, currency intervention has been the most powerful weapon – and last resort – left by Japan to stem sharp declines in the yen that have been raising import costs and threatening to hurt consumption.

Yen Interventions in the 1990s

“The first intervention in the Japanese currency in nearly a quarter century is an important step, but it is ultimately doomed to fail to defend the yen,” said Ben Lidler, global markets analyst at eToro in London.

“As long as the Fed remains hawkish, any intervention in the yen is likely to slow rather than stop the yen’s decline.”

Yen-buying intervention was very rare. The last time Japan intervened to prop up its currency was in 1998, when the Asian financial crisis caused a sell-off of the yen and a rapid influx of capital from the region. Before that, Tokyo intervened to counter the depreciation of the yen in 1991-92.

It is also more difficult to intervene in buying the Japanese yen than selling the yen.

In the yen selling intervention, Japan can continue to print yen to sell in the market. But for the yen-buying intervention, Japan needs to tap into its $1.33 trillion foreign reserves which, while abundant, can dwindle quickly if huge sums are needed to influence prices.

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(Reporting by Laika Kihara). Additional reporting by Tetsushi Kajimoto, Kantaro Komiya, Daniel Losink, Kaori Kaneko and Takaya Yamaguchi in Tokyo, Bansari Mayor Kamdar in Bangalore; Editing by Richard Boleyn, Sam Holmes and Kim Coogle

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