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Explainer-What would Japan's currency intervention to combat a weak yen look like?

Wednesday, September 14, 2022
Explainer-What would Japan's currency intervention to combat a weak yen look like? © Reuters. Employees of the foreign exchange trading company Gaitame.com work in front of monitors displaying the Japanese yen exchange rate against the U.S. dollar at its dealing room in Tokyo, Japan September 7, 2022. REUTERS/Kim Kyung-Hoon/File Photo
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By Leika Kihara and Tetsushi Kajimoto

TOKYO (Reuters) - The Bank of Japan has conducted a rate check in apparent preparation for currency intervention, the Nikkei website reported on Wednesday, citing unidentified sources, as policymakers stepped up warnings about sharp falls in the yen.

Aside from verbal intervention, Japan has several options to stem excessive yen falls. Among them is to directly intervene in the currency market and buy up large amounts of yen.

Below are details on how yen-buying intervention could work, the likelihood of this happening as well as challenges:

WHEN DID JAPAN LAST CONDUCT YEN-BUYING INTERVENTION?

Given the economy's heavy reliance on exports, Japan has historically focused on arresting sharp yen rises and taken a hands-off approach on yen falls.

Yen-buying intervention has been very rare. The last time Japan intervened to support its currency was in 1998, when the Asian financial crisis triggered a yen sell-off and a rapid capital outflow from the region. Before that, Tokyo intervened to counter yen falls in 1991-1992.

WHAT WOULD PROMPT TOKYO TO BUY YEN AGAIN?

Currency intervention is costly and could easily fail given the difficulty of influencing its value in the huge global foreign exchange market.

That is one key reason it is considered a last-resort move, which Tokyo would greenlight only when verbal intervention fails to prevent a free fall in the yen. The speed of yen declines, not just levels, would be crucial in authorities' decision on whether and when to step in.

Some policymakers say intervention would only become an option if Japan faces a "triple" threat -- selling of yen, domestic stocks and bonds -- in what would be similar to sharp capital outflows experienced in some emerging economies.

HOW WOULD IT WORK?

When Japan intervenes to stem yen rises, the Ministry of Finance issues short-term bills to raise yen which it can then sell in the market to weaken the Japanese currency's value.

If it were to conduct intervention to stop yen falls, authorities must tap Japan's foreign reserves for dollars to sell in the market in exchange for yen.

In both cases, the finance minister will issue the final order to intervene. The Bank of Japan will act as an agent and execute the order in the market.

WHAT ARE THE CHALLENGES?

Yen-buying intervention is more difficult than yen-selling.

Japan's foreign reserves stand at $1.33 trillion, the world's largest after China's and likely comprised mostly of dollars. While abundant, reserves could quickly dwindle if huge sums are required to influence rates each time Tokyo steps in.

That means there are limits to how long it can keep intervening, unlike for yen-selling intervention - where Tokyo can continue issuing bills to raise yen.

Currency intervention would also require informal consent by Japan's G7 counterparts, notably the United States, if it were to be conducted against the dollar/yen. That is not easy with Washington traditionally opposed to the idea of currency intervention, except in cases of extreme market volatility.

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    GBP/USD 1.1348 ↑ Buy  
    USD/JPY 144.82 ↑ Buy  
    AUD/USD 0.6489 ↑ Buy  
    USD/CAD 1.3611 ↑ Sell  
    EUR/JPY 142.54 ↑ Buy  
    EUR/CHF 0.9764 ↑ Buy  
    Gold 1,711.25 Neutral  
    Silver 20.955 Buy  
    Copper 3.4465 ↑ Sell  
    Crude Oil WTI 83.98 ↑ Buy  
    Brent Oil 89.40 ↑ Buy  
    Natural Gas 6.479 Buy  
    US Coffee C 215.55 ↑ Sell  
    Euro Stoxx 50 3,342.17 ↑ Sell  
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    DAX 12,209.48 Neutral  
    FTSE 100 6,908.76 Neutral  
    Hang Seng 17,079.51 ↑ Buy  
    Small Cap 2000 1,709.05 Buy  
    IBEX 35 7,462.00 ↑ Buy  
    BASF 40.940 ↑ Sell  
    Bayer 47.95 Sell  
    Allianz 161.54 Neutral  
    Adidas 119.00 ↑ Buy  
    Lufthansa 5.716 Sell  
    Siemens AG 100.92 ↑ Sell  
    Deutsche Bank AG 7.630 ↑ Sell  
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