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Latest data suggests Japanese policymakers may use Fed tools to fund currency intervention

2024-05-03

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Latest data from various Fed accounts suggested there were two ways Japanese policymakers may have financed currency intervention to boost the beleaguered yen over the past week.

One source could be a Federal Reserve facility in which the Fed holds cash overnight to earn market interest rates. The amount held in the Fed's overseas reverse repurchase agreement facility fell by about $8 billion to $360 billion as of May 1 from a week earlier, Fed data showed. It was the first decline since the week ending April 10. At the same time, another cash account used by the Fed fell by about $17.8 billion.

The data covered two occasions in a week when Japanese policymakers were likely to tap into currency markets to support the yen. The yen is the weakest among the Group of 10 currencies so far this year, while the dollar has generally strengthened.

Japan's Finance Ministry did not confirm the intervention, but a Bloomberg analysis of the Bank of Japan's accounts showed it took place. Analysis shows policymakers may have spent about 9 trillion yen (nearly $60 billion at current exchange rates) this week to shore up the yen, which would be on par with interventions in 2022.

"They did a good job of hiding the intervention," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities. "They must have prepared ahead of time, not rolling anything over and keeping a lot of cash."

Japanese yen surges

Monday is a holiday in Japan, and the yen once fell to a 34-year low of 160.17 yen per dollar before rebounding sharply in thin trading.

The yen suddenly jumped more than 3% in the final hours of U.S. trading on Wednesday, following the end of the Federal Reserve's two-day policy meeting.

According to the latest data from Japan’s Ministry of Finance, Japan’s foreign exchange reserves were worth approximately US$1.15 trillion as of the end of March, an increase of US$4.6 billion from the previous month. The Bank for International Settlements and other foreign central banks hold about $155 billion, down slightly from $155.7 billion at the end of February.

Before Japan intervened in October 2022 to defend the yen, central banks had been increasing cash parked on foreign reserve requirements (RRP) to a then-record $333 billion. Later that month, balances fell the most in five months.

However, Citigroup strategists wrote in a report last month that Japanese officials did not use this tool of the Fed in the last round of currency intervention in 2022, and most of the cash has not been used in a decade. Therefore, they expect some selling in Treasury bills or coupons if an intervention occurs.

The above information is provided by special analysts and is for reference only. CM Trade does not guarantee the accuracy, timeliness and completeness of the information content, so you should not place too much reliance on the information provided. CM Trade is not a company that provides financial advice, and only provides services of the nature of execution of orders. Readers are advised to seek relevant investment advice on their own. Please see our full disclaimer.

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Latest data suggests Japanese policymakers may use Fed tools to fund currency intervention

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