© Reuters. Japanese yen banknotes are seen in this illustration photo taken September 22, 2022. REUTERS / Florence Lo / Illustration
By Vidya Ranganathan
SINGAPORE (Reuters) – As the Bank of Japan enters the currency market for the first time in decades to defend the appreciating yen, it is facing a myriad of obstacles, mostly hard commitments. Start your own for extremely easy currency setups.
Thursday’s surprise yen-buying intervention by Japanese authorities – the first since 1998 – sent the dollar-yen exchange rate wide swings between 140 and 146 yen.
At the end of the busy day, as markets also digested a hawkish Federal Reserve rate hike and the BOJ’s pledge to keep rates negative, investors were equally bearish on the yen, which has since lost price almost 20% so far this year.
“It’s the first time since 1998, it’s quite symbolic, but I don’t think that will be effective in reversing the trend,” said Vincent Tsui, Asia analyst at Gavekal Research in Hong Kong. direction of the yen.
With a history of deflation, the Bank of Japan’s desire to keep interest rates low until it sees a steady and healthy rise in prices has made it a lone dove this year as central banks Other major global central banks actively raised interest rates to curb rising inflation. The US policy rate is currently 3 percentage points higher than that of Japan.
But the BOJ’s policy is at odds even at home, with the government worried about the impact of a weak yen on energy prices and consumer sentiment, and risk-averse households expected to idle cash reserves worth more than 1,000 trillion yen ($7.04 trillion). are ready to hunt for better-yielding properties abroad.
Governor Haruhiko Kuroda has made it clear that policy will not change and that even the Yen that the BOJ is buying as part of the intervention will be replaced.
“As long as we’re keeping the yield curve under control, any monetary tightening effects (coming from the intervention) will be absorbed,” he said on Thursday, referring to his weekly bond buying activity. BOJ’s consistent week to cap yields.
Brendan McKenna, international economist and currency strategist at Wells Fargo (NYSE 🙂 Securities, pointed out that even with the intervention, US yields have risen about 6 basis points on the day and Japanese yields have fallen, sending interest rates up and giving markets more reason for dumping the yen.
“The intervention was unilateral and it took place on the same day of the peaceful Bank of Japan meeting that speaks to the huge internal contradictions,” he said. Deutsche Bank George Saravelos, (ETR’s) head of FX strategy said in a note.
Saravelos said that such an intervention, while Japan adheres to a yield-curve control policy, would discredit the central bank and could help reduce some speculative positions in the yen. doesn’t really change the trend.
“Intervention to strengthen the currency is in direct conflict with the policy of the Bank of Japan, and is simply unreliable when a central bank is devaluing its currency by,” Deutsche said. excessive quantitative easing while the authorities pursue a stronger currency at the same time.
Citi analysts have noted how the 1997-98 yen buying intervention failed to reverse its devaluation.
Unlike now, yields then diverged widely but did not move against the yen. While the BOJ intervened heavily between April and June 1998, the yen didn’t bottom out until September.
However, those are early days. UBS strategist James Malcolm thinks the intervention could be a coordinated multi-month campaign, given the level of speculative positioning against the yen and its near $1.3 trillion foreign exchange reserves. Japan.
He pointed out that Japanese lending to non-residents hit a record high of $315 billion in the 12 months to July, and three-quarters of that was short-term, much of it accumulated since March.
“The success of the intervention is measured not in days but decades,” Malcolm writes, pointing out how the Japanese authorities last bought about $150 billion worth nearly 75 yen last year. 2011. Some of that is currently being spent, he calculates.
($1 = 142,800 yen)