(Bloomberg) — Japan likely stepped into currency markets for a third time this year to prop up the yen soon after US inflation figures came out Thursday, according to a Bloomberg analysis of central bank accounts.
The scale of intervention was probably around ¥3.5 trillion ($22 billion), based on a comparison of Bank of Japan accounts and money broker forecasts.
The figures indicate that Japan’s currency authorities tried to take advantage of a buildup of expectations for a Federal Reserve rate cut immediately after data showed US inflation cooling broadly.
The suspected intervention on Thursday would be the first aimed at boosting the yen when it was strengthening against the dollar, a fresh development in Japan’s strategy of trying to keep speculators on the back foot since it started propping up the yen in September 2022.
Some market watchers had already been alert to the possibility of intervention if US prices proved hotter than expected, which could have prompted a yen slump. The likelihood of Tokyo stepping in if the yen started strengthening had not been widely anticipated.
“The timing of intervention was unexpected,” said Shinichiro Kobayashi, chief economist at Mitsubishi UFJ Research & Consulting. “They wanted to show they have many ways to intervene as this battle drags on without any clear sign of light at the end of the tunnel.”
Finance Minister Shunichi Suzuki and top currency chief Masato Kanda both declined Friday to comment on whether they intervened in line with their responses following action earlier this year around the end of April. Local media reported that the authorities had stepped into the market citing unidentified officials.
The speculation of intervention surged after abrupt moves in the yen overnight. In little more than half an hour after weaker-than-expected US inflation data came out Thursday night in Tokyo, the currency strengthened sharply from around 161.58 against the dollar to 157.44, a move of just over 4 yen, on a similar scale to most of the previous interventions.
The yen was trading at around 159.09 against the dollar as of Friday evening in Tokyo. It has shed more than 11% this year, making it the biggest loser among major currencies.
The estimated size of the intervention is based on movements in the central bank’s accounts. The BOJ reported Friday that its current account will probably fall ¥3.2 trillion due to government fiscal factors on the next business day of Tuesday. That compares with an average forecast increase of ¥333 billion among private money brokers prior to the suspected intervention, including Central Tanshi, Totan Research and Ueda Yagi Tanshi.
“It looks highly likely they jumped on the strengthening of the yen and weakening of the dollar after the US CPI result to intervene and were able to boost the yen with less than the ¥4 trillion or so they spent last time in May,” said Yuichiro Takai, an analyst at Totan Research.
How to Tell If Japan Intervened to Prop Up the Yen: QuickTake
Comparing money broker estimates with the BOJ’s current account projection has proved accurate in calculating a ballpark figure for past interventions since September 2022.
In further evidence of intervention, Thursday was one of the busiest days for Japanese yen spot trading since November 2016, according to CME Group, the world’s largest regulated currency market. Some $53 billion was traded in the dollar-yen pair on CME’s spot EBS platform, the fourth highest since January 1, 2022, a representative for the exchange said in an emailed response to questions.
Earlier this year, the government spent a record ¥9.8 trillion in interventions around the end of April and the beginning of May to support the yen after it fell to a 34-year low against the dollar. Bloomberg calculations had estimated the scale of yen buying at ¥9.4 trillion.
Official monthly intervention data is due on July 31, when Kanda is scheduled to step down as part of a regular bureaucratic reshuffle, to be replaced by Atsushi Mimura, who is currently director general of the finance ministry’s international bureau.
Japan’s government has struggled to shift the tide in the foreign exchange market. Inflation has stayed elevated at or above the BOJ’s 2% target for more than two years, with the yen being a key driver. As real wages fall, consumer spending has dropped every quarter for a year though March.
One of the main factors driving the weakness in the yen is the difference in interest rates between the US and Japan, especially the differential between yields on long-term debt after accounting for inflation. That suggests that a rate hike by the BOJ or a rate cut by the Fed would help lift the yen.
Japan’s central bank has repeatedly said it does not target the yen and has shown resistance to overtly changing policy to support the currency. But Governor Kazuo Ueda has said that policy could be changed if the weak yen was seen changing the outlook for inflation.
There’s no unanimous view on the impact of the likely intervention on the BOJ’s policy decision on July 31. Some economists say the action in the markets made a rate hike more likely because following a government response, the central bank needed to act next. Others say it made it a rate hike more unlikely because pressure on the yen has eased.
“The BOJ won’t move on rates in July,” said Nobuyasu Atago, chief economist at Rakuten Securities Economic Research Institute, citing the continued sluggishness of consumer spending and the overall economy. “If they move now, they will be seen as reacting to the yen.”
“The BOJ is still haunted by its past mistakes of being forced to cut rates shortly after hiking,” former BOJ official Atago said.
–With assistance from Issei Hazama and Daisuke Sakai.
(Updates with comments from economists.)
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