Zhitong Finance learned that in early Asian trading on Monday, the yen fell below the 160 integer mark for the first time since 1990, but soared by nearly 400 points in just 30 minutes during the midday trading phase. The yen fluctuated almost as much as when Japan intervened in 2022. This has sparked speculation among market traders: has the Bank of Japan interfered in the foreign exchange market? Although the Japanese government said it would not comment, according to media reports on Monday, the Japanese authorities interfered in the foreign exchange market and reversed the previous sudden sharp decline in the yen.

Japan's top foreign exchange official, Masato Kanda, previously told reporters in Tokyo that if any intervention is taken, it will be disclosed at the end of May, and he is ready to act 24 hours a day, but he is unable to provide details on specific options.

The exchange rate of the yen against the US dollar continued to fall to a low of more than 30 years, leading people to speculate that the Japanese government may carry out a new round of intervention. Even after the Bank of Japan raised interest rates for the first time since 2007 in March of this year, the huge difference in borrowing costs between Japan and the US is still driving the yen lower. The Japanese authorities supported the yen three times in 2022. Japan has long been criticized by trading partners for tolerating and even encouraging depreciation of the yen to benefit its exporters, which is an extraordinary move for Japan. But Japan is increasingly aware of the pain caused by a weak currency.

1. Is there a specific level of triggering intervention?

While investors have been speculating that the Japanese authorities are determined to defend the yen's “bottom line,” it has never been absolute. Instead, the Japanese authorities tend to talk more about curbing excessive fluctuations. This is because Japan complies with international agreements, which stipulate that the exchange rate should be determined by the market. The Group of Seven (G7) has stated that excessive exchange rates and disorderly actions may be harmful to economic and financial stability, which provides room for member countries to intervene in the market when the exchange rate fluctuates greatly. Japan's senior foreign exchange official, Masato Kanda, once said that it is unusual for the exchange rate to fluctuate 4% or more within two weeks, which provides a rough standard for judging what is excessive. Internationally, interfering with the foreign exchange market to support the local currency is usually less problematic than actions to reduce the exchange rate — the latter may give a country's economy a competitive advantage.

2. How do you know if the government interfered?

The sudden appearance of a vertical line of changes in units of 2 yen on the price chart is usually the first sign that Japan is buying or selling a currency, especially when this line extends to around 4 yen units. Sometimes fluctuations can be triggered by market panic or trading algorithms, as happened in October 2023. Since Japan announced its first intervention in the foreign exchange market in more than 10 years in September 2022 (within minutes of the start of action), the country's foreign exchange officials have been adhering to a strategy of trying to leave doubts in the market to increase the vigilance of foreign exchange traders. In order to improve transparency, Japan's Ministry of Finance publishes intervention data at the end of every month, even if it does not conduct any transactions, and then publishes daily intervention data on a quarterly basis. The Bank of Japan's accounts can also provide clues about the size of unplanned spending. Exchange rate checking mechanisms can also trigger sharp market fluctuations, which are generally regarded as a precursor to actual intervention.

3. What is the exchange rate check mechanism?

In the past, the Bank of Japan would call traders to inquire about the price of the yen against the US dollar. This is one step away from actual yen intervention in trading, and its purpose is to warn traders to avoid one-way bets. This usually happens when market volatility intensifies, and regular verbal warnings from senior officials have not met expectations.

4. Who is calling for intervention?

Japan's Ministry of Finance decides whether to interfere in the market, while the Bank of Japan is responsible for buying or selling. This is usually preceded by well-designed verbal warnings from officials. If they say the government is not ruling out any options, or is ready to act decisively or boldly, this usually means making the market highly alert to possible impending intervention.

5. Where did the money come from?

When supporting the yen, the US dollar comes from Japan's foreign exchange reserves, which limited its firepower. As of the end of March, Japan held $1.15 trillion in foreign exchange. Japan spent 9.2 trillion yen ($59 billion) in the country's three times entering the foreign exchange market in 2022. It also appears to have sold some US Treasury bonds to help fund the operation, a practice that has greatly increased the proportion of foreign exchange reserves available for use.

6. Is interfering with the exchange rate a good idea?

Although intervention by buying local currency is a clear way to tell speculators that the government will not allow the local currency to depreciate in free fall, this will only be a temporary solution unless the economic fundamentals driving the trend are also addressed. Furthermore, foreign-exchange reserves are generally intended to protect the economy in the event of major financial shocks or accidents, rather than artificially bolster the currency. Unilateral action is still seen as unlikely to reverse exchange rate movements without US support, but it can buy time until market dynamics change.

7. Must Japan act unilaterally?

This is the most likely case. US Treasury Secretary Yellen met with Japan's Finance Minister Shunichi Suzuki and South Korea's Finance Minister Choi Sang-mok in April this year, and issued tripartite statements expressing concerns about the sharp depreciation of the yen and the Korean won. The statement prompted some to speculate that joint action might be taken to boost Asian currencies, but the barriers to massive market entry are still high. Yellen's remarks later this month suggest that intervention should occur “infrequently” and should be carried out with excessive fluctuation and prior consultation.