How Does Japan Intervene in Currency Markets?

Speculation that Japan may intervene to prop up its currency has flared repeatedly this year as the yen plummeted to a 24-year low against the US dollar. In mid-September, the Bank of Japan reportedly conducted a so-called rate check, a move often seen as a precursor to actual intervention. Days later it did just that, supporting the yen for the first time since 1998. It is an extraordinary move for a country that has long been criticized by trading partners for tolerating or even encouraging a weak yen to the benefit of its exporters.

1. Is there a specific level that triggers an action?

While investors speculate about a “line in the sand” that authorities are staunchly defending, it is never absolute. Authorities are more likely to talk about curbing excessive movements than defending specific levels. On September 22, the government intervened after the yen broke through 145 and fell further after the BOJ decided to keep its ultra-low rates. That put it within striking distance of the 146.78 level reached before a joint Japanese-US intervention to support the yen in 1998. Leading currency official Masato Kanda, who confirmed the September intervention, described the movements in the forex market as being sudden and one-sided.

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Read more: Why the yen is so weak and what that means for Japan

2. What is an installment check?

In past instances, the BOJ has called traders to inquire about the currency’s price quote against the dollar. It’s just one step away from an actual yen transaction and is meant to act as a warning to traders to avoid one-way bets. It usually happens when volatility increases and regular verbal warnings from ministers don’t have the desired effect. Before mid-September, the last reported decline was in 2016 when the yen was strengthening. It continued to rise despite this move, only falling after the US Federal Reserve initiated a series of rate hikes and the BOJ implemented yield curve control – a policy aimed at keeping the 10-year Treasury yield at a set level.

3. Who calls for intervention?

The Treasury decides whether to intervene in the market, and the Bank of Japan handles the buying or selling. It is usually preceded by a series of carefully choreographed verbal warnings from officers. When they say the government isn’t ruling out options or ready to take decisive action, it’s usually meant to put markets on high alert that intervention may be imminent.

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4. Where does the money come from?

Supporting the yen, the dollars are coming from Japan’s foreign exchange reserves, limiting its firepower. At the end of August, Japan had $1.17 trillion at its disposal – more than it had at the time of the April 1998 intervention. That’s a ratio of 2.4 times the daily value of the Tokyo foreign exchange market, compared to 1.4 times the buffer it had at the time had last time. However, a unilateral move without US support is still considered unlikely.

5. Is an intervention a good idea?

While intervention is a clear way of telling speculators that you will not allow your currency to go into freefall, it will only be a temporary fix unless the economic fundamentals driving the trend are also addressed. Additionally, foreign exchange reserves are generally used to protect the economy in the event of a major financial shock or unexpected event, not to artificially prop up your currency.

6. Would Japan have to do it alone?

Most likely. After the 2011 tsunami and during the Asian financial crisis, she was able to secure the support of the Group of Seven for intervention. But things are different now. Its main partners generally dislike countries setting or influencing exchange rates and want market forces to do the work. The G-7 and the Group of 20 – which includes Japan – have reached corresponding agreements. The Yen’s current weakness is being caused in part by a combination of continued BOJ monetary stimulus and Fed rate hikes. In that sense, it could be seen as a Japanese-caused event and that could weaken the case for action.

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7. How do we know if the government intervened?

Sometimes the government announces it, like this year. In 2011, the finance minister summoned the press and announced the G-7’s coordinated intervention while it was taking place. A sudden, long vertical line on a price chart can also indicate that the BOJ has bought or sold, but sometimes these moves can be triggered by people panicking in the market. The Treasury publishes intervention numbers at the end of each month, even if it hasn’t made any purchases or sales.

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