By Amanda Cooper and Brigid Riley
LONDON/TOKYO (Reuters) – Japanese official buying to defend the yen has become a standard feature of the foreign exchange market landscape in 2024, but authorities in Tokyo have changed their tactics, making it harder for investors to guess when and how they might intervene.
The new intervention tactics may have fooled traders enough to help Japanese financial authorities turn around their currency, which hit its weakest level against the dollar since 1986 just four weeks ago.
The Bank of Japan is likely to have spent about 6 trillion yen ($38.4 billion) this month to support the yen, at the Finance Ministry’s request.
With the dollar trading at a 38-year high of around 160 yen two weeks ago, authorities in Tokyo have been warning almost daily that they will intervene if volatility proves excessive or if the Japanese currency’s level does not reflect underlying economic and monetary policy realities. So another round of intervention comes as no surprise.
There was no official confirmation of the intervention, but when the first round of the double whammy arrived on July 11, traders believed the BOJ pounced on weak U.S. inflation data that weighed on the dollar — selling dollars as the greenback slipped, not as the yen weakened.
The USD/JPY pair, which is now trading below the 155 yen level, fell within minutes to around 158.3 from 161, immediately raising doubts among traders about intervention.
“It looks like the MoF and the Bank of Japan may have turned into ‘momentum traders’, seizing the right moment to hit the market when it was at its weakest,” Chris Weston, a market strategist at Pepperstone, said at the time.
Typically, the Bank of Japan intervenes when U.S. Treasury yields and the dollar rise.
“This time it wasn’t the case. In fact, it was during the dollar sell-off, which caused the dollar/yen to fall, that we saw this unusual shift in the yen,” said Hiroyuki Machida, head of foreign exchange and commodity sales at ANZ Bank.
“If we assume that the dramatic and sudden movement of the yen over a short period of time was the result of intervention, it was actually different from the patterns we have seen in the past,” Machida said.
A second round of suspected official buying on July 12 made investors nervous enough that a further rise in the yen on July 15 was initially linked to an intervention that market data later showed likely did not occur.
Bank of America, which has argued for some time that the Bank of Japan might opt for routine intervention, like the Swiss National Bank, says Japanese authorities probably had three goals in mind: maximizing impact, enhancing the element of surprise, and staving off any excessive speculative moves.
job done?
The attempt appears to have worked. The yen has risen about 4% this month, and options positions are starting to shift.
Traders are less confident than they have been for some time that the yen is on a one-way path toward further weakness.
The derivatives market shows that the premium in the price of one-month yen call options is growing relative to the price of put options – an indication that traders are turning more bullish.
The main driver of the yen’s 30% decline in the past four years has been the discount in interest rates in Japan compared to rates elsewhere, but most notably in the United States.
The Bank of Japan is due to meet on July 31 to set monetary policy, and with a very mixed bag of economic data the chances of a rate hike from 0.1% are about 50/50.
Meanwhile, the US Federal Reserve is almost certain to cut interest rates by a quarter percentage point when it meets in September to a range of 5.00% to 5.25%.
Lee Hardman, FX strategist at Mitsubishi UFJ Bank, said the currency’s moves in July “suggest a change in strategy by Japan to become more proactive rather than just reactive when providing support to the yen.”
Speculators still hold one of the biggest bets against the yen ever. At nearly $12 billion, it has more than doubled in value since the start of 2024 alone.
With a bearish stance of this magnitude, the prospect of more aggressive intervention is “terrifying,” said ANZ’s Machida.
“It’s very painful. You might have been sitting back, thinking you made a profit at 161 yen, but now it’s at 156 yen. If the Bank of Japan had intervened at that level, at 156 yen, you might have wanted to give up.”
(1 dollar = 156.1000 yen)