Judging the BoJ’s FX intervention

>> Why is the yen so weak?

However, in the Standard Bank’s view, the BoJ should be cut some slack here, particularly if we judge the results of intervention against the meagre expectations that the BoJ is likely to have had beforehand.

Much of the commentary that we read about the BoJ’s recent FX intervention seems to doubt that the bank can effect a significant and sustainable turnaround in dollar/yen. The wide rate gap between the US and Japan, the backtracking on the timing of Fed rate cuts, and the lack of more policy tightening from the BoJ are all cited as reasons why the intervention will fail.

As a result, it seems that many expect dollar/yen to start rising again; potentially surpassing the 160 level that the BoJ seemed so keen to defend just over a week ago. But should we regard intervention as a failure waiting to happen? We are not so sure. For a start, we have to define what success actually means.

If we look at things through the eyes of the Japanese Ministry of Finance – which sets the intervention policy, we doubt that the bar for success was set very high in the first place. It knows that the rate gap is huge with the US and probably won’t be closed anytime soon by Fed rate cuts. It also knows that the US dollar is generally quite strong with this term US ‘exceptionalism’ used as a reason to justify the bullishness.

>> Will the BoJ use a three-step process to intervene in the FX market?

The MoF would have also known that other central banks were unlikely to join in the intervention and hence the MoF probably did not seek their support in the first place. It also knows that the BoJ is not going to subjugate its monetary policy to the defence of the yen. Yes, rates will probably rise again in the future, but only when the BoJ is more confident about returning inflation sustainably to target, not to defend the yen.

“With all these hurdles out in front we rather suspect that the MoF’s ambitions for intervention don’t go much further than just trying to stabilise the yen. Prior to intervention dollar/yen had been climbing rapidly once the prior high of 152 had been broken, rising to 160. We dare say that – absent intervention - a decisive break of 160 would have brought forth another steep rise in the dollar. Compared to this outcome, a dollar/yen rate close to 150 right now looks a real result. Of course, it is early days yet and it seems as if the BoJ has had to throw quite a lot of money at the problem; probably in excess of USD50bn”, said Steve Barrow, Head of Standard Bank G10 Strategy.

Nonetheless, Steve Barrow argued that the intervention to date has been successful. This might be a shock to some but recent history suggests that intervention success is not such a surprising outcome. The BoJ’s foray into the market in September and October 2022 managed to stop dollar/yen at the 150 level and within a few months, dollar/yen was back down to 130. Now clearly that fall in dollar/yen might have been a coincidence, while the BoJ’s decision in December 2022 to effectively allow a rise in 10-year JGB yields, by widening the permitted trading range, might have also helped lift the yen against the US dollar.

What’s more, that intervention arguably only bought time because, by October 2023 US dollar/yen was back up to 150 again. All these factors may suggest that intervention right now won’t be as successful in pushing US dollar/yen back towards 130, or even lower. But again, Steve Barrow suspected that Japanese policymakers are aiming for little more here than removing the yen’s vulnerability to the ‘one-way bet’ syndrome that seemed to be in place before the intervention and, in addition, to buy some time before likely rate cuts from the Fed help to lower the US dollar against, not just the yen, but other currencies as well. With this in mind, even if US dollar/yen does little more than hang around in a 150-160 range for a time, while we await Fed rate cuts, then we’d see that as successful intervention even if the BoJ has to spend a few US dollar’s more to make this happen.