Bank of America believes that in the long run, the Bank of Japan’s intervention to defend the yen will cost more and last longer than in 2022.
On this May Day golden week, facing the previous decline of the yen, the Bank of Japan did not “lie flat”.
Since the end of April, the trend of the Japanese yen in the foreign exchange market has fluctuated sharply. The Japanese yen/US dollar exchange rate had previously fallen below 160, but on May 3rd it rebounded to 152.75, with a weekly increase of up to 3.5%, a new high in 17 months. Both Japanese Prime Minister Fumio Kishida and the highest ranking official in charge of Japan’s foreign exchange affairs, Makoto Kanda, have expressed “no reservations” about whether the Japanese government and central bank will take action to “save the yen” in the short term.
The latest announcement on the website of the Bank of Japan on May 2nd showed that due to fiscal factors, its current account may decline by 4.36 trillion yen on May 7th (the Japanese market was closed on May 3rd and 6th due to public holidays).
The latest announcement from the Bank of Japan is intriguing. What exactly happened behind the sharp fluctuations of the Japanese yen in the foreign exchange market during the week from April 29th to May 4th?
(‘How the Bank of Japan Defends the Japanese Yen (Source: Xinhua News Agency Image)’,)
The Bank of Japan suspects three interventions
In this round of yen exchange rate fluctuations, market participants speculate based on statistics from the Bank of Japan that the first intervention by the Bank of Japan may occur on April 29th, with an intervention scale of approximately 5.5 trillion yen. After the intervention, the overnight US late trading saw the yen/dollar exchange rate soar from around 157.58 yen to 153.04 yen in just a few minutes. At that time, traders speculated that the Japanese government and central bank may have intervened.
The second intervention by the Bank of Japan is believed to have occurred on May 2nd, with a scale of approximately 3.5 trillion yen. But after these two suspected interventions, the strength of the Japanese yen in the foreign exchange market did not last long. On May 2nd during the Asian trading session, the Japanese yen fell 1.1% against the US dollar, touching 156.28 yen, further approaching the suspected pre intervention level.
On May 3rd, it is suspected that the Bank of Japan will once again come to an end, bringing the yen to the US dollar exchange rate back within 153. As a result, the Japanese yen rose nearly 3.5% against the US dollar this week, the largest weekly increase in 17 months.
The last time the Japanese government and central bank intervened in the exchange rate was in September and October 2022, when the Japanese Ministry of Finance spent approximately 9.2 trillion yen (approximately 60.6 billion US dollars) to support the yen exchange rate three times. At that time, the Japanese yen exchange rate briefly dropped to 151.95 yen against the US dollar. The effect of the intervention was immediate, and in the last two months of 2022, the Japanese yen exchange rate rose from 151 yen to around 127 yen per US dollar. However, as the Federal Reserve continues to raise interest rates and the Bank of Japan continues its ultra loose monetary policy, the yen is further down the path of depreciation.
The current Japanese government and central bank continue to maintain a sense of mystery regarding foreign exchange intervention, and have not acknowledged foreign exchange intervention operations. The relevant data is only market analysis results. However, the Japanese government releases monthly data on foreign exchange intervention. The relevant data for April will be released at 18:00 on April 30th. However, monthly announcements usually do not include data for the last few working days of each month. Therefore, whether the Japanese government and central bank will intervene again after a year and a half, and the specific scale of intervention will be announced at the end of May. At that time, the Japanese Ministry of Finance will announce the total amount of funds used to intervene in the foreign exchange market from April 26 to May 29.
Warning intervention risks
Experts interviewed by First Financial believe that even if the government intervenes, it cannot fundamentally reverse the decline of the Japanese yen in the foreign exchange market. Chen Yan, the director of the Research Institute of Japanese Enterprises (China), told First Financial: “The effect of intervention is also temporary, after all, the scale of the yen that the government can provide is limited, and it will eventually be diluted in the huge foreign exchange market. Therefore, it is impossible to maintain the long-term upward trend of the yen through intervention.”
Chen Yan told First Financial that “in the Abenomics that has a profound impact on the current Japanese economy, the depreciation of the Japanese yen occupies an important position. This policy has continued to this day, even if the Bank of Japan changes hands and enters the era of planting crops.” In addition to the “national policy” that the Japanese government has adhered to for more than a decade, Chen Yan also believes that the depreciation of the Japanese yen is in the interest of large Japanese enterprises, especially those actively expanding overseas. “For Japan, having sufficient products on hand can sell overseas, expand product sales, increase corporate benefits, and to a considerable extent, strengthen the export of domestic products due to currency depreciation, increase vitality for enterprises, enrich stock prices, and make financial foundations more solid.”
Koji Fukaya, a researcher at Tokyo market risk consulting firm, also believes that “the government’s intervention is aimed at issuing a warning not to allow the yen to fall freely. However, it is difficult to expect the yen to reverse its decline. Not only investors and traders see it this way, but the general public in Japan also sees it this way.”
The latest report from JPMorgan Chase’s Japan Market Research Department shows that as of the end of March 2024, Japan’s official foreign exchange reserves contain approximately $994 billion in securities and $155 billion in deposits. In theory, the Japan Monetary Fund can intervene using all its foreign exchange reserves, but in reality, it is unlikely to do so.
Moreover, JPMorgan Chase stated that in the previous foreign exchange commitments reached by G7 countries, foreign exchange intervention was only a special action used to address excessive market volatility in the short term.
On April 26th, the current US Treasury Secretary Yellen cleverly responded to the question of “if Japan intervenes in the currency market” regarding the fluctuation of the Japanese yen. Yellen said, “Adjusting exchange rates through the market is one of the ways in which countries can have different policies. For countries with decisive influence in the foreign exchange market, intervention should only be carried out in extremely rare situations.” She also emphasized that the United States hopes that these situations will occur rarely and only when there is excessive volatility, and they can seek advice in advance.
On May 4th, former US Treasury Secretary Summers stated that monetary intervention is ineffective in changing exchange rates, even with Japan’s recent large-scale intervention measures. He said, “Given the huge size of the capital market, I think the evidence is quite clear that intervention is not working – even considering the scale of Japan’s intervention.” At the same time, Summers said that the yen has become stretched thin.
The latest research report from Bank of America also mentioned the recent fluctuations in the Japanese yen. Bank of America believes that in the long run, the Bank of Japan’s intervention to defend the yen will cost more and last longer than in 2022, as carry trades and Japan’s structural deficit continue to exert upward pressure on the yen/dollar exchange rate until the Federal Reserve begins to cut interest rates; In the short term, if the intervention scale of the Bank of Japan exceeds 10 trillion yen (approximately 65 billion US dollars), it is estimated to be unfavorable for the yen, as it means a rapid decline in foreign exchange reserves.