Japan: Japanese authorities' multibillion FX interventions fail to boost the yen
October 25, 2022
The Japanese yen has fallen 3.9% against the U.S. dollar over the last month—briefly reaching a 32-year low—and by 23.6% year to date. After a USD 20 billion intervention last month, Japanese authorities made another intervention on 21 October worth at least USD 30 billion, according to the Financial Times. Recent news reports suggest a third has been conducted this week. Regardless, this hasn’t been enough to significantly boost the yen. The reason is simple: the U.S. Fed has raised its policy rate by 300 basis points so far this year and has signaled around 150 basis points of additional tightening, while the Bank of Japan (BoJ) has insisted that rates will not rise for the foreseeable future.
Although the yen is seen remaining weak in the near term, all of our panelists see the currency recovering some of its recent losses by the end of 2023. With USD 1.2 trillion in international reserves, the Japanese authorities have the firepower to deter further advances by the dollar beyond the JPY 150 per USD mark. This will buy BoJ Governor Haruhiko Kuroda enough time to wait out the end of the U.S. Fed’s hiking cycle—expected in Q1 2023—following which there should be a gradual easing in the yield gap between benchmark U.S. treasuries and Japanese bonds.
One upside risk is a change in monetary policy: ditching negative interest rates and “yield curve control”—the cap on 10-year government bond yields. A recent poll suggested a slight majority of Japanese want the BoJ to review its ultra-accommodative monetary policy, suggesting pressure on BoJ Governor Kuroda to tighten monetary policy is growing. If monetary policy were tightened, this would reduce the interest rate differential between Japanese and U.S. assets, which in turn would boost the yen. Other key factors to watch include energy prices and the pace of the U.S. Fed’s rate hikes.
Author: Matt Cunningham, Economist