Did BoJ make any forex market interventions?

>> Will the yen’s recovery require more FX intervention?

That follows the prior bout of intervention at the end of April. Both forays into the FX market suggest that the Japanese authorities are being a bit cuter with their intervention tactics. But will ‘cute’ bring success? In the Standard Bank’s view, it seems unlikely.

Last week’s MoF/BoJ intervention, if confirmed, seems to have come just as the US released sub-consensus CPI data that had already put the dollar on the back foot. It might have been a coincidence, but we suspect that it was not; the Japanese authorities saw the weak CPI data and tried to exploit it with FX intervention. If that’s true, it raises a number of questions.

First of all, the Standard Bank thinks it is the first time that the MoF/BoJ has timed its intervention in this way.

A second issue is whether it had any prior knowledge of the CPI report. If not – and it does seem very unlikely – the MoF/BoJ was presumably primed and ready to go should the CPI data come through below consensus expectations. Of course, it is possible that the MoF/BoJ had decided to buy the yen whatever the CPI – although we think that’s unlikely as a strong CPI could just have seen the BoJ throwing away huge amounts of money.

A third issue is whether the US authorities – the Treasury and the Fed – will be happy that the BoJ has ‘used’ the US CPI release in this way.

Fourthly, does it set a precedent? Should the Standard Bank expect MoF/BoJ intervention whenever poor US data are released, or perhaps at other times when dollar-negative information is forthcoming, like a cut in rates from the Fed? Given that the US authorities are not helping the MoF/BoJ with its intervention, which may reflect a snub or possibly just the fact that the MoF/BoJ has not requested help, Japanese policymakers might not be concerned if their intervention inflame tensions with the US.

Whatever the answer to all of these questions, one thing seems sure; that the MoF/BoJ are being much cuter with their intervention tactics. Because before this US CPI ploy, the previous intervention on July 29^th occurred on a Japanese holiday when the authorities knew that the market would lack liquidity and that their intervention could consequently have a much bigger impact. All of this looks as if it will keep the market guessing about other ‘cute’ tactics that the MoF/BoJ could use to get the most bang for the buck.

However, at the end of the day, we’re still left with the biggest question of all: can being cute with intervention bring long-lasting rewards in terms of a stronger yen, or is it just a temporary gimmick that can buy (a short amount of) time and nothing else? The ‘fundamentals’ of intervention would tell us that it is the latter; that ‘cute’ intervention won’t persistently lift the yen.

>> Could conditions be better for the carry trade?

What are these fundamentals? At their heart is the requirement that intervention is accompanied by monetary policy change, or left unsterilized. But herein lies the rub for, even though the BoJ made its first rate hike in March policy rates are still zero, or some 525-bps behind the Fed and it is still buying JGBs while the Fed is normalising its balance sheet.

Over the past year, for instance, the Fed’s assets have shrunk by around 12% but have risen by close to 2% for the BoJ. With this in mind, it seems imperative that the BoJ not only hikes rates more (and hopes the Fed cuts) but also uses the July 31^st meeting, or a later one, to draw in its JGB purchases or, better still, stop them altogether.

But the cost of this could be a steep rise in JGB yields and, while that might be helpful when it comes to successful intervention in the yen; it might not be what the BoJ wants in terms of the broader policy stance for an economy that’s not exactly robust and where the government has a debt-to-GDP ratio of over 250% of GDP. “The BoJ could solve its currency problem but only at a cost of creating a debt problem. In short, it is not easy but, in our view, being ‘cute’ is not the answer”, said the Standard Bank.