Japanese Yen Sees First Gain in Weeks After Intervention

The yen was heading on Friday to its first weekly gain in over a month after Japanese authorities intervened in markets to support the currency for the first time in 24 years.

The surging US dollar has kept other currencies pinned near multi-year lows, but the yen was up about 0.1% at 142.22 per dollar in Asia, after a more than 1% rally late on Thursday amid news Japan had defended its battered currency.

However, trading was thin on Friday with the country’s markets closed for a public holiday.

The intervention came after the Bank of Japan stuck with its ultra-low rate policy, which prompted a drop in the yen past 145 per dollar to a 24-year low.

“Given that (the BOJ) runs … against the grain of rising interest rates, in order to have any chance of success, they’re going to have to be in this for the long haul,” Ray Attrill, head of FX strategy at National Australia Bank, said.

“My sense is that the law of diminishing returns will set in, as far as intervention is concerned.”

Sterling lost 0.27% on Thursday and fell to $1.12285, close to a 37-year low of $1.1213 hit in the previous session and little helped by a 50 basis-point rate hike by the Bank of England overnight.

The euro, Aussie and kiwi were likewise languishing near fresh lows on Friday in the face of a surging greenback, which received a boost from a very hawkish Federal Reserve policy announcement and rising Treasury yields that kept the dollar in demand.

The benchmark 10-year Treasury yield hit an 11-year high of 3.718% overnight, while the two-year yield remained well above 4%.

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Dollar Powering

The US dollar index rose 0.16% to 111.40, hovering near a two-decade high of 111.81 hit in the previous session, and is on track for a weekly gain of 1.5%.

The euro fell 0.11% to $0.9823, close to a 20-year trough of $0.9807 hit overnight.

Flash September purchasing managers’ indexes for the euro zone, the UK and the United States, due later on Friday, will provide a better overview regarding the darkening global outlook.

The risk-sensitive Aussie dropped 0.38% to $0.66165, while the kiwi fell 0.31% to $0.5828. Both had fallen to their lowest since 2020 in the previous session.

Westpac chief economist Bill Evans said in a note on Friday he has lowered his forecast for the Aussie to $0.65 by the end of this year, from $0.69 previously.

BOJ a Lone Dove

The Bank of Japan’s sudden burst of yen-buying intervention by Japanese authorities caused a large 6 yen move between 140 and 146 in the dollar-yen exchange rate.

At the end of a busy Thursday, which also saw markets digest a hawkish Federal Reserve rate rise and a BOJ pledge to keep rates negative, investors were no less bearish on the yen, which has depreciated nearly 20% so far this year.

“It’s quite symbolic in the sense that this is the first time since 1998, but I don’t think that will be effective in reversing the trend of the yen,” said Vincent Tsui, Asia analyst at Gavekal Research in Hong Kong.

Given a history of deflation, the Bank of Japan’s desire to keep rates low until it sees stable and healthy price rises has made it a lone dove this year as other major global central banks aggressively hike rates to contain surging inflation. US policy rates are now 3 percentage points higher than Japan’s.

But the BOJ’s policy is at odds even at home, with a government worried about the impact of a weak yen on energy prices and consumer sentiment, and its risk-loving households with idle cash reserves worth more than 1,000 trillion yen (over $7 trillion) which are poised to hunt for better-yielding assets overseas.

Governor Haruhiko Kuroda made clear that policy won’t change, and even the yen the BOJ is buying as part of intervention will be replaced.

“As long as we are doing yield curve control, whatever monetary tightening effect (that comes from intervention) will be absorbed,” he said on Thursday, referring to the BOJ’s consistent weekly bond-buying operations to cap yields.

Brendan McKenna, international economist and currency strategist at Wells Fargo Securities, noted how even as the intervention occurred, US yields rose roughly 6 basis points on the day and Japanese yields fell, driving a bigger wedge in interest rates and giving markets even more reason to dump the yen.

“That the intervention has been unilateral and that it happened on the same day of a dovish Bank of Japan meeting speaks to the very large internal contradictions,” Deutsche Bank’s head of FX strategy George Saravelos said in a note.

‘Loss of Credibility’

Saravelos says such intervention, while Japan sticks to a yield curve control policy, will result in a loss of credibility for the central bank, and might help reduce some speculative yen positions without really changing the trend.

“Intervention to strengthen the currency is at direct odds with Bank of Japan policy,” Deutsche said, and that it was simply not credible for a central bank to be debasing its currency via extreme amounts of quantitative easing while authorities pursued a stronger currency at the same time.

Citi analysts noted how the 1997-98 bout of yen-buying intervention failed to reverse its depreciation.

Unlike now, yields then were wide apart but not moving against the yen. While the BOJ intervened heavily between April and June 1998, the yen didn’t trough until September.

Still, it’s early days. UBS strategist James Malcolm reckons the intervention may be a concerted campaign lasting many months, given how much speculative positioning there is against the yen and Japan’s war chest of nearly $1.3 trillion in FX reserves.

He points to Japan’s lending to non-residents which hit a record high of $315 billion in the 12 months to July, and three-fourths of which was short-term, most of it built up since March.

“Intervention success is not measured in days but rather decades,” Malcolm wrote, pointing to how Japanese authorities had last bought about 150 billion worth of dollars at close to 75 yen in 2011. Some of that is being spent now, he reckons.