The Japanese government entered the market to directly buy yen for the first time in 24 years, driving the exchange rate of the yen to rebound from the 145 yen level on Thursday (22nd), but many market observers believe that if the Bank of Japan (central bank) does not raise interest rates, it may Limited success.
The Bank of Japan kept its ultra-loose monetary policy unchanged on Thursday, triggering the yen to break the 145 yen-to-$1 barrier, and investors waited for the exchange rate to fall further below 146 yen. However, the Ministry of Finance entered the market to buy Japanese yen on Thursday evening, and the exchange rate once rose above the 141 yen price.
“It was carefully designed to crack down on speculators who have been pushing the yen lower,” said a Japanese bank insider, according to the Nikkei. The person was surprised.
After the yen fell below the 144 yen mark against the dollar, when the Bank of Japan conducted a rate “check” on September 14, market observers speculated that the 145 price would be the central bank’s bottom line, but almost everyone agreed that given the many constraints on direct intervention , the central bank will be limited to verbal declarations.
The biggest problem is that loose monetary policy is clearly at odds with supporting the yen, which is an environment that encourages devaluation. “The BOJ’s easing policy and yen buying are contradictory,” said Yujiro Goto, chief currency strategist at Nomura Securities.
The Bank of Japan, which prioritizes supporting the economy, adheres to a dovish policy approach. Therefore, if the Bank of Japan does not raise interest rates and change its fundamentals, Tokyo’s ability to resist depreciation will be limited.
The source of intervention funding is another issue. “It’s uniquely difficult to buy yen,” said Ei Sakakihara, known as “Mr. Yen,” adding that the government’s move on Thursday was “quite surprising.”
As of the end of August, Japan’s foreign exchange reserves totaled 1.29 trillion US dollars, or about 185 trillion yen. While this may seem like a healthy number, the Bank for International Settlements (BIS) survey in April 2019 showed that Japanese foreign exchange turnover averaged more than $370 billion per day.
If you don’t take into account that Japan’s foreign exchange turnover covers other currencies, this means that Tokyo’s silver bullet can only last about three days.
The Japanese government’s foreign exchange reserves, which include dollars and U.S. government bonds, are used by Japan to exchange dollars for yen.
Nomura Research Institute economist Kimuchi Tohide said that the size of the market is huge, and foreign exchange reserves cannot actually cover all markets, and this kind of intervention is difficult to continue.