Explainer-What would Japanese intervention to boost the weak yen look like? By Reuters

by Leika Kihara

TOKYO (Reuters) – Japanese authorities are facing renewed pressure to combat a continued decline in the yen, fueled by market expectations that the Bank of Japan will keep interest rates ultra-low even as other central banks tighten monetary policy to curb inflation.

Aside from verbal intervention, the Japanese government has several options to halt what it views as excessive yen depreciation. Among them is the direct intervention in the currency market, the purchase of large amounts of yen, and the dollar is usually sold against the Japanese currency.

Here are details of how a buy-yen intervention works, the likelihood of this happening and the challenges of such a move:

Another intervention in buying the yen?

Japan bought the yen in September, its first foray into the market to boost its currency since 1998, after the Bank of Japan’s (BOJ) decision to maintain a very loose policy sent the yen down to 145 against the dollar. He intervened again in October after the yen fell to a 32-year low of 151.94.

Why move?

It is rare to intervene to buy the yen. Often, the Ministry of Finance sold the yen to prevent its appreciation from hurting the export-dependent economy by making Japanese goods less competitive abroad.

But the yen’s weakness is now seen as a problem, as Japanese companies shift production abroad and the economy relies heavily on imports of goods ranging from fuel and raw materials to machine parts.

What happens first?

When Japanese authorities escalate their verbal warnings to say they “stand ready to act decisively” against speculative moves, it is a sign that intervention may be imminent.

Traders view rate checking by the Bank of Japan, a practice in which central bank officials call dealers and ask at what rate to buy or sell the yen, as a possible precursor to intervention.

line in the sand?

Authorities say they look at the speed of the yen’s decline, rather than levels, and whether the moves are driven by speculators, in deciding whether to get involved.

However, market players see the first threshold at 145 yen to the dollar, where Japan intervened last. Analysts say that if the dollar breaks above there, 150 yen could be the next line in the sand.

What is the trigger?

The decision is very political. When public anger over a weaker yen and subsequent rise in the cost of living is high, it puts pressure on management to respond. This was the case when Tokyo intervened last year.

But while inflation remains above the Bank of Japan’s 2% target, overall pressure has eased with global fuel and commodity prices falling from last year’s highs.

If the yen’s decline accelerates and angers the media and the public, the opportunity for intervention will rise again.

The decision will not be easy. The intervention is expensive and could easily fail, given that even a large impulse purchase of yen would dwarf the $7.5 trillion traded daily in the foreign exchange market.

How it works?

When Japan intervenes to stop the rise of the yen, the Ministry of Finance issues short-term bonds, raises the yen and then sells it to weaken the Japanese currency.

However, to support the yen, the authorities must take advantage of Japan’s foreign dollar reserves to sell them for yen.

In either case, the Minister of Finance issues the order to intervene, and the Bank of Japan executes the order in its capacity as Under-Secretary.

challenges?

The intervention of buying the yen is more difficult than selling the yen.

While Japan has approximately $1.3 trillion in foreign reserves, it could erode significantly if Tokyo repeatedly spends huge amounts of money on the yen.

This means that there are limits to how long Japan can continue to defend the yen, as opposed to intervening in selling the yen – essentially Japan can print the yen by issuing banknotes.

The Japanese authorities also consider it important to seek the support of the G7 partners, in particular the United States if the intervention is related to the dollar.

Washington gave tacit approval when Japan intervened last year, mirroring recent close bilateral ties.

But interfering frequently would be difficult, as Washington has traditionally been reluctant to intervene except in cases of extreme market volatility.