Japan’s intervention won’t support the yen for long

  • The US dollar fell against the Japanese yen on Thursday after Japan intervened in the foreign exchange market for the first time since 1998.
  • Japan is trying to defend the value of the yen which has fallen 25% against the greenback this year.
  • One analyst said the timing was “very bad”, just after the Fed’s last rate hike.

The U.S. dollar fell to a two-week low against the Japanese yen on Thursday after Japan dumped dollars to defend its battered currency, but the yen’s gain isn’t expected to last long as the Federal Reserve pledged to aggressively raise interest rates, analysts said.

The dollar lost as much as 2.6% when it hit 140.33 against the Japanese yen, the lowest level since Sept. 6. But the dollar cut the loss to 1.2% to buy 142.23 yen.

Japan’s first intervention in the currency markets since 1998 has been acknowledged by the US Treasury Department.

“The Bank of Japan intervened in the foreign exchange market today. We understand Japan’s action, which it believes is aimed at reducing recent increased volatility in the yen,” the Treasury said in a statement. It was Japan’s first intervention in the foreign exchange market since 1998.

This year, the dollar has climbed 25% against the Japanese currency, underscoring the greenback’s overall strength against major currencies as the Federal Reserve aggressively raises rates to fight inflation. The US dollar index has gained about 16% in 2022.

The Fed on Wednesday posted its third consecutive hike of 75 basis points. At its Thursday meeting, the Bank of Japan kept rates at minus 0.1% and reiterated its longstanding policy of daily purchases of 10-year bonds, moves aimed at keeping the 10-year yield at 0.25%. The BOJ has been controlling its yield curve since 2016 in an effort to raise inflation.

The “timing for this was very bad, wasn’t it? Just hours after the BOJ’s inaction, you decide to buy huge amounts of yen with your dollar reserves. The government has so [in] foreign exchange reserves and it will have to repeatedly buy more and more yen in order to defend its value,” Fawad Razaqzada, market analyst at Forex.com, wrote in a note. The yen hit a 24-year low against the dollar this year.

“For government intervention to be more effective, the BOJ will need to end its divergent monetary policy with the US Federal Reserve (and other major central banks around the world,” he wrote.

While the yield on 10-year Japanese bonds is hovering around 0.25%, the 10-year US Treasury yield climbed above 3.6% on Thursday, the highest since 2011. The higher yield makes holding US debt more attractive to foreign currency holders and weighs on the value of the yen.

The BOJ “has again extended its increasingly solitary policy of accommodation,” Mark Haefele, chief investment officer of UBS Global Wealth Management, said in a note. “Along with widening credit spreads, Japan’s weak trade balance (partly due to high energy prices) has also contributed to the weakening of the yen. We see upside risk for USDJPY in the near term. .”

The yen’s jump following the Japanese finance ministry’s intervention “may not be the last,” Craig Erlam, senior market analyst at Oanda, said in a note. “Interestingly, the level reached by the pair was only a little lower than in 1998 when it last intervened, which has sparked further speculation as to whether this is the line unofficial in the sand,” he said.

“It has been denied, but rate control has also taken place around 145, so there may be more than volatility. It will be interesting to see how keen traders are to put this to the test. test in the future,” he wrote.

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