Why hasn’t the Japanese government intervened yet as the volatility risk of the yen continues to intensify after falling to a “dangerous” level of 160

Last week, due to the Bank of Japan’s more hawkish interest rate decision than market expectations, the yen continued to plummet against the US dollar in the foreign exchange market. The exchange rate of the US dollar against the Japanese yen surged 1.69% last Friday to 158.27, not only recording the largest daily increase of the year, but also breaking a decades high.

On the morning of the 29th in the Asia Pacific region, the US dollar continued to rise against the Japanese yen, breaking through the 160 mark and reaching around 160.20.

The current question among many market participants has shifted from “when will the Japanese government intervene” to “why hasn’t the Japanese government intervened yet”. Many market participants believe that the risk of short-term yen intervention and short profit taking is increasing, but at the same time, it is also expected that the effectiveness of Japanese government intervention will be limited.

('What is the prospect of the Japanese yen in the foreign exchange market (source: Xinhua News Agency image)',)(‘What is the prospect of the Japanese yen in the foreign exchange market (source: Xinhua News Agency image)’,)

After falling to a “dangerous” level of 160, volatility may intensify

On the one hand, the Bank of Japan kept its policy unchanged last Friday, but it hardly provided any clues to reduce the purchase of Japanese treasury bond, which was not as “hawkish” as expected by the market, and Bank of Japan Governor Yoshio Ueda said after the announcement of the interest rate resolution that the weakness of the yen has not had a “significant impact” on inflation so far. The traders subsequently vented their disappointment and the yen further depreciated.

On the other hand, the US dollar has attracted new buyers, reversing the previous downturn caused by the US Gross Domestic Product (GDP) data, as the Federal Reserve’s most important personal consumption expenditure (PCE) data shows that core inflation in the US is still higher than the Federal Reserve’s 2% target. As a result, the market expects the Federal Reserve to postpone interest rate cuts, which means the US and Japan will maintain a large interest rate spread for a longer period of time.

The Federal Open Market Committee (FOMC) meeting held by the Federal Reserve from April 30 to May 1 was the main focus of the market this week, as investors have anticipated that the Federal Reserve will postpone interest rate cuts due to high US inflation.

Many market professionals who have previously been interviewed by First Financial reporters believe that,

In addition, late April to early May is Japan’s “May Day Golden Week” holiday, which covers multiple holidays. Before April 29th this year, it happened to be the weekend, and most office workers would choose to take a three-day leave to get nearly 10 days of vacation (April 27th to May 6th). This situation of weak liquidity in the foreign exchange market is believed to exacerbate the volatility of the US dollar against the Japanese yen. In fact, the daily volatility of the currency over the past two trading days has exceeded 500 points, and the implied volatility has also significantly increased.

Vishnu Varathan, Asia Economic and Strategic Director at Mizuho Bank in Singapore, predicts that before the FOMC meeting, there will be more two-way fluctuations in the US dollar against the Japanese yen, which is slightly different from the steady rise of the US dollar against most other currencies in the past few weeks. For this FOMC meeting, he expects that “the threshold for sustained hawkish unexpected statements from the Federal Reserve is quite high, and such statements usually drive up yields. Therefore, from the perspective of the US Japan interest rate spread, the threshold for further depreciation of the yen is indeed high. At present, the Federal Reserve may be more indecisive, and disappointment with the Bank of Japan may shift to the Federal Reserve.”

The risk of short-term intervention in the Japanese yen and the risk of short profit taking are increasing

It is worth mentioning that the 160 mark is the bottom line expected by most market analysts for Japanese government intervention, and the high point of the US dollar against the Japanese yen in 1990 was also at 160.20. The possibility of further breaking through in the short term is unlikely, which is also considered the reason why the exchange rate quickly fell nearly 100 points after reaching this level today. In addition, last Friday, although the Japanese yen experienced its largest decline against the US dollar in six months, it briefly surged to 154.97, sparking market speculation that the Japanese government may have suppressed the exchange rate before possible intervention. Today, the situation reappeared. After falling below 160 in the early morning trading of the Asia Pacific region, the Japanese yen rebounded strongly against the US dollar, and briefly regained the 155 level in the afternoon trading, currently reporting at 156.97.

More and more market participants believe that in the short term, attention should be paid to the possibility of Japanese government intervention and the possibility of yen bears taking profits. There are reports that Japanese banks are selling the US dollar at high prices, but they claim to be only clearing customer cash flows. A foreign exchange trader told reporters that driven by algorithmic trading, some funds have also been selling the US dollar.

Krishna Bhimavarapu, Asia Pacific economist at Dao Fu Global Investment Management, told First Financial reporters, “The Bank of Japan has maintained its policy unchanged and hinted at a possible interest rate hike this year. Kazuo Ueda mentioned at a press conference that the upward risk of inflation caused by the weakening yen may become a consideration factor affecting monetary policy. However, he also stated that so far, the weakening yen has not had a significant impact on inflation. Therefore, the yen may continue to weaken in the short term, but at the same time, it will also face a higher risk of intervention.”

Chris Weston, research director of Pepperstone Group, said: “The Japanese government may reiterate that they have not specifically intervened in the target position, but they do pay close attention to the trend and change speed of the yen.” He added that the current level of the yen indicates that they must take action as soon as possible, otherwise they will face a credit crisis. “If they do not take action, foreign exchange market investors will treat the yen as the ‘bond volunteers’ treated Japanese treasury bond in the past.”

Japan’s May Day golden week may also provide short-term rebound momentum for the yen. An investor told a reporter from First Financial News that she had just bought Japanese yen over the weekend because she saw that the yen had already fallen significantly and she would go on two self driving trips to Japan every year, so she had started hoarding Japanese yen.

Market betting intervention has limited effectiveness

Although the market has begun to bet on the risks of short-term intervention and short profit, many market participants also believe that even if the Japanese government intervenes in the foreign exchange market, the effect will be limited.

Kamakshya Trivedi, Global Monetary, Interest Rate, and Emerging Markets Strategy Director at Goldman Sachs, said that the risk of yen intervention has indeed increased significantly, but at the same time, the global macroeconomic background indicates that intervention actions are difficult to succeed, and the yen will continue to weaken further. “The combination of various exchange rate influencing factors measured under our baseline forecast is very negative for the Japanese yen. The only question is to what extent Japanese policymakers will prevent the depreciation of the yen, and we believe that the relevant tools are limited,” he said.

Watson also stated that while continuing to short the yen at current levels is risky, if the Japanese government takes action later, speculators who are currently shorting the US dollar against the yen are likely to buy back at lower levels. He said, “I can imagine that hedge funds are likely to set limit orders of 400-500 points below the current exchange rate level to seize the short-term trading opportunities brought about by the Japanese government’s intervention. Of course, limit orders also mean that any significant drop in the US dollar against the Japanese yen will quickly rebound.”

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