Japan may have spent over $22 billion in FX intervention

Japan may have spent up to 3.57 trillion yen ($22.43 billion) on Thursday in its most recent intervention in the foreign exchange market to wrest the yen up from 38-year lows, Bank of Japan data suggested on Friday.

The Ministry of Finance appears to have spent around 3.37-3.57 trillion yen intervening in the market on Thursday to support the Japanese currency, the data showed.

On Thursday, the yen had been hovering at about 161.61 per dollar when it sharply appreciated around the release of US consumer price figures, rallying nearly 3 per cent to as far as 157.40.

The softer US inflation reading pulled down the dollar and some traders speculated Japanese officials may have seized on the weakness to amplify the boost to the yen.

The Ministry of Finance has so far remained mum on whether or not it was behind the yen’s sudden and steep strengthening, only repeating authorities’ readiness take action as needed in the foreign exchange market.

Norihiro Yamaguchi, senior Japan economist at Oxford Economics, says it was “highly likely” that Japanese authorities intervened on Thursday given the significant difference between the BOJ’s projected current account balance and estimates from money market dealers.

The central bank’s projection for money market conditions on July 16 indicates a 3.17 trillion yen net receipt of funds, compared with a net credit of 200-400 billion yen in estimates from money market brokerages that excludes intervention.

Currency trades take two business days to settle, and Japan’s markets will be closed for a public holiday on July 15.

“It’s clear that MOF intervened, but it’s not going to have a long-lasting impact unless they come in again and do a bigger one over Japan’s long weekend,” said Shoki Omori, chief Japan desk strategist at Mizuho Securities.

“Otherwise, people will just take this as a dip-buying opportunity in dollar-yen.”

Tokyo spent roughly 9.8 trillion yen ($61 billion) defending the yen at the end of April and early May, according to official data, after the currency hit a 34-year low of 160.245 per dollar on April 29.

But despite those efforts, the yen continued to slide, hitting its lowest since December 1986 at 161.96 on July 3. Even after the yen’s latest rally, it remains down over 11 per cent against the dollar so far this year, and was last trading at around 159.18.

Given the massive chasm between Japanese and US interest rates, analysts say it’s difficult to stop the yen’s decline until rate differentials narrow. A recent string of cooling inflation data and softer growth figures out of the US have spurred bets that the Federal Reserve could begin cutting interest rates in September.

Markets expect the Bank of Japan will raise its rates from near zero this year, albeit at a gradual pace as the economy remains fragile. It next meets at the end of July.

Meanwhile the yen steadied on Friday, a day after the Bank of Japan likely intervened to prop up the currency, on the coat-tails of an unexpected drop in US consumer prices that fuelled the largest drop in the dollar since May.

The Japanese currency, which has been languishing around 38-year lows, strengthened rapidly on Thursday in the European afternoon, sparking speculation that authorities in Tokyo may have stepped in to buy.

This was just after the US consumer inflation report for June showed prices were easing and boosted the odds of the Federal Reserve cutting rates as soon as September. Daily operations data from the BOJ on Friday suggested the central bank had spent between 3.37-3.57 trillion yen ($21.18-22 billion) on buying the yen on Thursday, less than three months after its last foray into the market.

Tokyo’s top currency diplomat, Masato Kanda, said on Friday authorities will take action as needed in the foreign exchange market, but declined to comment on if authorities had intervened.

“Currency interventions should certainty be rare in a floating rate market, but we’ll need to respond appropriately to excessive volatility or disorderly moves,” Kanda said.

A separate report from the Nikkei news outlet said the BOJ had likely conducted rate checks for the euro/yen currency pair, which analysts said was not very common.

“There are two unusual things. Firstly, (rate-checking) the euro, which is a bit strange and secondly, normally, they (BOJ) do the rate checks before they intervene and this rate check came after the intervention,” Pepperstone markets analyst Michael Brown said.

“But I guess it just shows that trying to second-guess what the Ministry of Finance is going to do is almost impossible,” he said.

The MOF declined to comment on the report.