Yen Intervention: Is It Over for USDJPY?

In early trading on Monday, the yen suddenly strengthened and the USDJPY fell by well over 500 bps in a matter of minutes. The consensus is that the only way that could have happened is if the BOJ intervened in the exchange rate. Japanese officials have declined to acknowledge that Yen intervention happened, saying that the data will be available in May.

The timing is exactly when intervention would have been expected. It was a holiday in Japan on Monday, which meant that trading in the yen had less volume and there was less liquidity. In those conditions, it’s normal for the currency to move faster. It would also exacerbate the potential effect of intervention, allowing the BOJ to get more “bank for their buck” as it were.

Bringing Down the Levels

The slow light weekend trading session, the USDJPY had pushed up above the 160 handle, and that’s when it suddenly fell to the 155 level. There was an attempt at a rally, but the pair was again pushed down, this time below the 155 mark. That kind of indicates that there were two instances of intervention over the course of three hours. Subsequently, the pair hasn’t dared to go above the 157 level, which is where it was pulled down from on the second instance.

However, the pair is trading higher than it was on Friday, meaning that post intervention, the yen is still weaker than it was at the end of last week and following the BOJ’s decision to leave rates unchanged. As we noted previously, Japanese officials had been trying to prop up the currency with words, but the sudden move over the weekend apparently was too much to tolerate.

So, What Happens Now?

There are a couple of things to note regarding Yen Intervention. First, even though it’s the BOJ doing the buying on the market, it’s acting on behalf of the Ministry of Finance, using the government’s reserves. This means that the amount of intervention that can be done by Japan is limited by the government’s reserves. This isn’t the case if, for example, there is coordinated intervention with the Fed, which has an unlimited amount of dollars at its disposal to support the yen. As long as the intervention is one-sided, then officials are likely to be trying to nudge the market in the right direction. Such as intervening when there is less liquidity.

The other thing is that Japanese officials are trying to “scare” out speculators, notably carry traders. The idea of the intervention is to push the price down in a strong move that triggers stop losses and forces out “speculators”. If there is a clear understanding that the yen won’t be allowed to weaken beyond a certain point then speculators might shy away. After all, a carry trade only works if the yen remains weak. If it suddenly appreciates, then the carry trader can lose money. The loss from the sale will exceed the gain in the difference of interest rates.

Will It Work?

The last time around, the government intervened and the price of the yen reverted. But that also coincided with the arrival of a new BOJ governor who was widely expected to raise rates. Now, rates have been raised, and the yen remains weak. That means the exchange rate could be lacking an important tailwind, and that might mean Japanese officials will have to be more persistent in keeping the USDJPY in check.

What has been established are some guidelines on what the BOJ will tolerate. The intervention after hitting 160 implies that is a ceiling for the pair for now, with a potential “soft” ceiling of around 157. It’s now a question of whether the market thinks it can challenge the Japanese Ministry of Finance to run down its reserves – and risk coordinated action with the Fed.

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