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Even $1.2 Trillion of Reserves Isn't Enough to Scare Yen Bears

·4 min read

(Bloomberg) -- Japan has more firepower in its foreign exchange reserves than it did the last time it intervened in markets to support its currency, though a unilateral move is seen as unlikely to succeed without US support.

Should it choose to act alone to defend an attack on the weakening yen, Tokyo will rely on reserves built up at a faster pace than growth in the local currency market since 1998, when it stepped in to bolster the yen around the tail-end of the Asian financial crisis.

Japan had $1.17 trillion in foreign currency reserves at the end of August compared with average daily yen trading volume in Tokyo of around $479 billion. That’s a ratio of 2.4 times the daily value of the currency market, compared with the 1.4 times buffer it had in April 1998.

Back then it splashed out around $21 billion propping up the yen on its own, an amount equivalent to around 10% of its foreign reserves at the time.

Speculation that Tokyo might have to resort to currency intervention has been reignited this month as the yen plunged to a fresh 24-year low against the greenback. Traders have renewed their focus on the policy divergence between a Bank of Japan insisting on rock-bottom interest rates and a Federal Reserve vocally planning for aggressive hikes.

Resurgent Dollar

The greenback has pushed higher against currencies worldwide, but the pressure on the yen has been greater. It weakened by more than 4.5 yen per dollar over two days last week, prompting senior government officials to give their strongest hints yet that intervention is among the options on the table.

Bank of Japan Governor Haruhiko Kuroda joined the pushback after a meeting with Prime Minister Fumio Kishida on Friday, describing rapid falls as undesirable. The yen steadied after the meeting, though it has been well past levels where Japan previously intervened in the market for some time.

Trading around the 142.60 level Tuesday, traders are watching for a break of 145 in the dollar-yen, which touched 144.99 last week. That brings 146.78 into play, the level reached before a joint Japan-US intervention to support the yen back in 1998.

Past experience shows that US support is critical for turning the tide of a currency attack. Economists say Japan is very reluctant to intervene in the market out of fear the move could backfire, prompting a deluge of bets against the yen.

“In reality I don’t think Japan will intervene,” said Harumi Taguchi, principal economist at S&P Global Market Intelligence. “The biggest reason behind the weak yen is the continued rate hikes from the Fed. Unless that changes, I don’t see intervention having an impact.”

Given its commitment to Group of Seven agreements on letting markets set currency rates, Tokyo would also need another sharp slide it could describe as one-sided and speculative to justify the action. At best, it might be able to briefly bloody the noses of speculators to buy time were it to step into markets alone.

The UK’s inability to do even that in 1992 when speculators including George Soros bet against the pound continues to serve as a stark warning of the limitations of fighting the market when fundamentals are against you.

A Trader’s Guide to Japanese Policy Makers’ Language on the Yen

For the time being, US help looks unlikely. The US Treasury Department stuck by its reluctance to support any potential intervention in forex markets last week. Unlike in 1998, Japan isn’t struggling amid an Asian financial crisis that put the global economy at risk and the yen weakness is largely self-inflicted.

“The US won’t support intervention,” said Masaaki Kanno, chief economist at Sony Financial Group Inc. “The US is comfortable with the strong dollar as it’s taking away some inflationary pressure.”

“The simple solution would be for the BOJ to raise rates, but the BOJ is refusing to do that because of the lack of sustainable inflation,” said Kanno, who worked at the central bank when Japan intervened in 1998. “Japan has created its own constraints.”

Historic Alliance

Japanese finance ministry and Federal Reserve data show that far less firepower is needed to move markets when the US gets on board. The US and Japan spent a combined $2.5 billion in June 1998 to stem pressure on the yen, a fraction of Tokyo’s earlier unilateral salvo in April of that year.

Ahead of the joint intervention, the yen rebounded from a little under the 147 level amid Japanese media reports that US officials were considering a trip to Tokyo to discuss the economy, according to a Fed report on the year’s forex operations.

It strengthened to almost 136 per dollar by the end of June 17, the day of the joint move.

By the summer, the yen was in its final wave of weakness, dipping past the 147 mark. But the tide finally turned on news that then Treasury Secretary Robert Rubin was set to meet Japanese Finance Minister Kiichi Miyazawa.

Speculators drew their conclusions on what that might mean. In a further demonstration of the power of potential US involvement, a further intervention wasn’t needed.

More stories like this are available on bloomberg.com

©2022 Bloomberg L.P.