Anticipation Grows for Possible FX Intervention to Support Japanese Yen

The Japanese Yen has faced a considerable amount of pressure recently, depreciating by 3.5% against the US Dollar and by over 5.6% against the Euro since the start of the month. The EURJPY pair has ascended to its highest point since September 2008, while the USDJPY pair is currently trading above the 143.50 mark, a level at which intervention was deemed necessary in October and November of the previous year. Furthermore, this trading level is proximate to the significant turning point witnessed in 1998.

The yen’s acute weakness, coupled with its closeness to historical highs, has led traders to speculate on the possibility of an intervention by the central bank, undertaken at the urging of the Ministry of Finance, to bolster the exchange rate. However, it’s important to note that the government and the central bank place less emphasis on the nominal exchange rate, choosing instead to focus their attention on various economic indicators.

Among these, the Bank of Japan’s core Consumer Price Index (CPI) holds paramount importance. Recent observations reveal an acceleration in this index to 3.1% year-on-year from 3.0% in the preceding month, up from a low of 2.7% recorded in February. Although the inflation rate in Japan is considerably lower than those in the US and Europe, there are no apparent signs indicating a peak in the near future.

For the Japanese economy, this translates into inflation expectations becoming more firmly entrenched. On one hand, this rise in inflation aligns with the central bank targets set in previous decades. This alignment might explain the relative indifference displayed by the Bank of Japan, which has so far refrained from taking any steps towards tightening monetary policy to counteract rising prices.

There exists a common belief that depreciation in the exchange rate enhances export competitiveness. However, this principle only truly holds when there is a certainty that the exchange rate will remain stable.

Consequently, the argument for intervening to prop up the yen is gaining traction, although predicting the timing of such an action remains a challenge. The intervention could be triggered by the current USDJPY level of 143, where the pair has been hovering for three consecutive days, or it may be provoked by the 150 mark, a level to which the USD ascended in October 2022. Nonetheless, the exact timing and circumstances under which such an intervention may occur continue to be a matter of speculation among traders and market observers