Significant fluctuations in the yen trigger intervention speculation. How has the intervention of the yen been done in history?

Source: Wall Street News

While the Japanese government has ample foreign exchange reserves to support the yen exchange rate on its own, the cost of intervening FX markets is also high without the Fed's interest rate cut support.

The yen has fallen sharply in recent weeks, with the US dollar quickly breaching 152 and 155, two psychological barriers considered likely to intervene by Japan's Ministry of Finance, falling even slightly below 160 on Monday, refreshing the record low since April 1990. Subsequently, the yen bounced back strongly, recovering from 155 to 155.33 now, prompting market speculation that Japanese authorities may have intervened.

In the face of the dangerous yen, how will the Japanese authorities act? In a recent report released by the HSBC FX analyst Joey Chew, the Japanese government, revisited the history of the Japanese government's regular pre-exchange market and pointed out that while the Japanese government has ample FX reserves to support its own move to support the yen exchange rate, the cost of intervening in the foreign exchange market is also high without the Fed's interest rate cut support.

If the Fed does not cut interest rates, intervention policy will also suffer
First, HSBC points out that from past experience, the impact of Japan's separate intervention on the exchange market is far less than that of joint US-Japan action:

Coordination tends to be more effective than separate intervention. For example, the total dollar sold by Japan and the United States on 17 June 1998 was only USD 25 billion, but the impact on the USD (the difference between the highs and lows on the plate was 6%) was greater than the previous two times when Japan acted separately:

On April 10, 1998, Japan sold $200 billion, and the difference between the highs and lows of the plate was 3.3%; compared to December 19, 1997, Japan sold $54 billion, and the difference between the highs and lows of the plate was only 1.4%.

HSBC also considers that the Fed rate cut is a necessary condition and an “amplifier” for the Japanese government to predict:

During the 1989-1990 intervention, the Federal Reserve continued to cut interest rates, and about three months after the joint intervention of June 17, 1998, the Fed also cut interest rates.

In contrast, the Fed is still in an interest-rate hike cycle from September to October 2022. Although its last rate increase was in July 2023, as of April 2024, there is still no rate cut in the United States. Therefore, the USD/JPY is now about 9% higher than the average level in September-October 2022.

Analysts stressed that if the Japanese government is determined to intervene alone in the Fed's high interest rate nodes, given the impact of the recent surge in yen trading volumes, more massive intervention is now needed to dominate the spot yen market. Analysts estimate that Japan's Ministry of Finance needs to mobilise up to US$1 trillion in foreign exchange reserves to effectively intervene in foreign exchange markets:

In nominal terms, Japan's intervention has been increasing over the years (1989—1990: $270 billion; 1997-98: $310 billion; 2022: $630 billion), but based on the scale of immediate USD/JPY trading volume, it dominated today's FX spot trading volume as it did in the 1980s and 1990s, Japan's Ministry of Finance may need to spend a total of US$1200 billion (35% of recent USD/JPY daily trading volume).

However, it is not a problem for the Japanese government if it is necessary to intervene. Japan has ample foreign exchange reserves. As of March 2024, its foreign exchange reserves amounted to $1.3 trillion, of which about $1600 billion were deposits and $1 trillion were securities. The current total foreign exchange reserves can cover 20 months of imports, up from 7-10 months in the 1980s.

Analysts also believe that Japan's weakness is the result of ultra-loose policy, and as Ueda and men have begun to drive the Bank of Japan's move, the underlying headwinds in the yen are also expected to improve over the long term.

History of Japanese Government Interventions
The Japanese authorities last intervened on the yen exchange rate in October 2022, when the yen rate fell to US$1 to 152 yen in October 2022. It is estimated that Japanese authorities spent as much as 9.2 trillion yen ($67.8 billion) defending the yen exchange rate at the time.

The following is a timeline of the Japanese authorities' past interventions in the exchange market:

1973: The Japanese Monetary Authority decided to allow the yen to float freely against the US dollar.

1985: The five industrialized nations (G5, the US, Japan, Germany, France, and the United Kingdom) signed the Plaza Accord, agreeing to jointly intervene in foreign exchange markets and weaken the dollar index to solve the huge US trade deficit problem.

February 1987: Six countries in the Group of Seven (G7) sign the Louvre Agreement, which aims to stabilize foreign exchange markets and prevent a sharp fall in the US dollar.

January 4, 1988: The dollar fell to ¥120.45 on the Tokyo Stock Market, setting a new low since World War II. The Bank of Japan intervenes, buys US dollars and sells yen.

1991-1992: The Bank of Japan sold the dollar to support the yen.

1993: The Bank of Japan sold the yen for most of the year to restrain the yen from strengthening.

April-August 1995: The USD/JPY rate fell to a postwar low. The United States has intervened several times, often in cooperation with Japan and the European Central Bank to support the dollar.

1997-1998: The Asian financial crisis caused the yen to soften, reaching US$1 to 148 yen in August 1998. The Bank of Japan and the Federal Reserve joined forces to buy the yen substantially.

January 1999 - April 2000: The Bank of Japan sold the yen at least 18 times, including once through the Federal Reserve and once through the ECB, on fears that monetary strength would hinder economic recovery.

September 2001: After the 9/11 terrorist attacks in the United States, the yen rose rapidly, and the Bank of Japan, in coordination with the Federal Reserve and the European Central Bank, intervened to sell the yen.

May-June 2002: The Bank of Japan again intervened in foreign exchange markets, with the support of the Federal Reserve and the European Central Bank, selling the yen.

March 2004: After Japan's intervention of 35 trillion yen (more than $3000 billion) was announced, the end of a 15-month effort to suppress the yen's rise.

September 15, 2010: Japan intervenes in currency markets for the first time in six years after the US dollar hit a 15-year low of 82.87 yen to stop the currency from appreciating.

March 18, 2011: After the earthquake, the yen soared to an all-time high, and the Group of Seven (G7) joined forces to intervene to prevent the yen from strengthening.

August and October 2011: The Japanese authorities sold off the yen significantly in order to prevent a one-way rise in the yen from damaging the export-dominated recovery of Japan's economy.

June 10, 2022: The Japanese government and the central bank issue a joint statement saying they are concerned about the significant drop in the yen against the dollar after the exchange rate fell to 134pc (verbal intervention).

September 7, 2022: Government Spokesman Matsunobo expresses concern about the “rapid, piecemeal” movement of the currency market after the yen fell below 143 points (verbal intervention).

October 21-24, 2022: The US dollar fell more than 7 yen in a single day, with reports suggesting that this was due to the Japanese government buying yen. Japan's finance minister, Junichi Suzuki, refused to confirm whether the government interfered with the exchange market.

March 27, 2024: The Bank of Japan, the Ministry of Finance and the Bank of Japan hold a meeting after the yen fell to a 34-year low against the dollar to indicate readiness to intervene (verbal intervention).

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