How Does Japan Intervene in Currency Markets?

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The yen’s rapid decline against the U.S. dollar this year has traders and analysts speculating that Japan might intervene directly to support its currency for the first time in more than two decades. Stepping in to buy yen and sell dollars would be an extraordinary move for a country that’s long been criticized by trading partners for tolerating or even encouraging a weak yen to benefit its exporters. 

1. Who makes the call?

The finance ministry would decide whether to intervene in the market and the Bank of Japan would do the buying or selling. It’s usually preceded by a succession of carefully choreographed verbal warnings by officials. If they say the government isn’t ruling out any options, or that it’s ready to take decisive action, that’s usually meant to put markets on maximum alert that intervention may be imminent. 

2. Is there a certain level that triggers action? 

When the government intervened in the past, it was most often to weaken the currency. The last time it propped up the yen was during the Asian financial crisis of 1998 when it reached around 146 to the dollar, threatening Japan’s fragile economy and broken banking system. While traders often speculate about a “line in the sand” that the authorities are determined to defend at any cost, that’s never absolute. Instead, authorities talk of containing excessive moves or stabilizing the market. In 2002, the yen reached 135 to the dollar but the finance ministry didn’t intervene as it preferred to keep the currency weak. Its top currency official at the time was the current BOJ governor, Haruhiko Kuroda. 

3. Where does the money come from?

The dollars Japan needs for propping up the yen come from its foreign currency reserves, which puts a limit on its firepower (Japan’s reserves stood at $1.4 trillion in March.) To fund its moves to weaken the yen, it issues treasury bills, enabling a far more sustained campaign in the markets if needed. 

4. Is intervention a good idea?

While it’s a clear way to tell speculators you won’t allow your currency to go into freefall, it’s only going to be a temporary fix unless economic fundamentals driving the trend are also addressed. In addition, foreign reserves are generally there to protect the economy in the event of a major financial shock or unexpected event, not to artificially prop up your currency.

5. Would Japan have to go it alone? 

Most likely. It was able to secure Group of Seven support for intervention after the 2011 tsunami and during the Asian financial crisis. But things are different now. Its main partners generally don’t like countries to set or influence exchange rates and want market forces to do the work. The G-7 and Group of 20 — both of which include Japan — have agreements to that end in place. The yen’s current weakness is driven partly by a combination of continuing BOJ monetary stimulus and U.S. Federal Reserve rate hikes. In that sense, it could be seen as a Japan-driven event, and that may weaken the case for action. 

6. How will we know if the government intervened?

It’s been pretty forthcoming in the past. In 2011, the finance minister summoned the press and announced the G-7’s coordinated intervention as it was happening. A sudden, long vertical line on a price graph can also signal that the BOJ has bought or sold, but sometimes those moves can be triggered by people panicking in the market. The Ministry of Finance releases intervention figures at the end of each month, even if it hasn’t done any buying or selling. 

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