The yen hits a 34-year low! Falling to the "bottom line", is the Bank of Japan about to intervene?

On April 24, the yen's exchange rate against the U.S. dollar continued to be weak, with the U.S. dollar against the yen standing at 155 for the first time since June 1990. The continued weakness of the yen may stimulate the Japanese Ministry of Finance to intervene in the trend of the yen.

When will the government intervene when the yen is weak?

The U.S. dollar remained steady against the Japanese yen during Asian trading on Wednesday. After entering the European and American trading hours, the Japanese yen began to continue to weaken, and the USD/JPY exchange rate quickly exceeded the 34-year high of 155. The yen was also weak against other major currencies. The euro-yen exchange rate hit a record high of 165.8580, and the pound-yen exchange rate was also close to a 10-year high of 193.53.

The continued weakening of the yen has attracted worldwide attention, but the Japanese authorities have only verbally intervened in recent times and have not taken practical actions.

Japanese Finance Minister Junichi Suzuki once said that measures to "respond to disorderly fluctuations in foreign exchange" have not been shelved. Masato Kanda, the deputy finance minister in charge of international affairs, also said that he is paying close and urgent attention to the trend of the yen. Japan's Chief Cabinet Secretary Masaashi Hayashi also reportedly said authorities would not rule out taking any measures to combat excessive currency fluctuations, echoing statements from other government members that currency fluctuations are being watched with a high degree of urgency.

Research institutions have long expected Japan’s official intervention in the exchange rate. In March, when the U.S. dollar-yen exchange rate exceeded 150, Standard Chartered Bank issued a report that the yen's exchange rate was close to the "critical line" for Japanese intervention in the yen.

Steven Englander, head of global G10 foreign exchange research and North American macro strategy at Standard Chartered Bank, said: Japan is "very, very close" to intervening in the yen. "I think it's actually very, very close to them (Japanese authorities) stepping in... They've discussed the political consequences and no one is sitting there asking for a devaluation of the yen," he said.

Englander also said that the potential intervention in the yen is aimed at buying time for the Japanese authorities until the Federal Reserve starts to cut interest rates or the Bank of Japan raises interest rates again. He further noted that the last time Japanese authorities intervened in the yen, in 2022, it "worked very well," although investors were initially skeptical about the effectiveness of such currency intervention.

But throughout April this year, the "intervention" was only heard but not seen, allowing the Japanese yen to go further and further down the road of depreciation. In just one month, the USD/JPY exchange rate exceeded 155.

Bank of America said in a report on Tuesday that the 155 dollar-yen exchange rate is the "bottom line" for Japan's Ministry of Finance. If the yen falls below this level, the Ministry of Finance will intervene. If the Ministry of Finance does not intervene when the exchange rate is around 155, the market may quickly push the USD/JPY exchange rate to 160.

The report believes that after the U.S. inflation data in March was higher than expected, the yen exchange rate weakened further against the U.S. dollar, raising the risk of intervention by the Japanese authorities. Strategists said intervention could push the dollar-yen exchange rate down to 145-150 and could remain in that range. However, if the Fed delays the first rate cut until the end of the year, the USD/JPY trading range may shift to 150-155 in the third quarter, and could fall to 160 if the Fed does not cut rates this year.

How will the Japanese government intervene?

The Bank of Japan will hold a monetary policy meeting from April 25 to 26, and the market generally expects the Bank of Japan to remain on hold.

In 2022, Japan’s Ministry of Finance spent approximately 9.2 trillion yen (approximately US$60.6 billion) three times to support the yen exchange rate. The Japanese Ministry of Finance's purchase of yen is the first time the Japanese government has intervened in the foreign exchange market to support the yen exchange rate since 1998. Before the Japanese government intervened in the foreign exchange market at that time, the Japanese yen exchange rate plummeted to 151.95 yen per US dollar. However, the effect of market intervention was immediate. In the last two months of 2022, the U.S. dollar-yen exchange rate fell from 151 to around 127.

However, as the Federal Reserve continues to raise interest rates and Japan's ultra-loose monetary policy continues, the Japanese yen is further and further on the road to depreciation. Entering 2023, the Japanese yen is once again on the path of depreciation.

Regarding what form the Japanese government will take to intervene in the market this time, Bank of America believes that the method of this intervention may be different from the large-scale intervention in 2022. The Ministry of Finance may guide the USD/JPY downward through smaller-scale but more frequent intervention. .

For example, the Ministry of Finance sold USD/JPY to initially push it down 1% and then waited for the market to pull back 0.5%. The Ministry of Finance can then move USD/JPY down another 1% and repeat the operation. At some point, markets that are now holding USD/JPY at higher levels will realize the Ministry of Finance's strategy and guide USD/JPY lower on their own.

In addition, the Ministry of Finance can also first lower the USD/JPY exchange rate to close to 150 through a large-scale intervention, and then further guide the USD/JPY exchange rate downward through smaller intervention.