Japanese financial officials have finally stepped in (again) to stop the runaway weakness in the yen. But the timing and amounts involved open up some questions. Particularly ahead of key economic data that would be pivotal for the trajectory of the yen. It also raises some issues about what to expect from the BOJ.
There had been quite a bit of speculation that there would be another round of intervention when the USDJPY popped above the 160 handle in late June. But, nothing happened, and the market grew bolder about believing that the Japanese officials wouldn’t step in to support their currency.
The Importance of Timing
Last week, the BOJ stepped in to boost the yen in the wake of weaker US CPI numbers. As a matter of Japanese policy, Japan doesn’t officially confirm intervention in the FX markets, so all talk about the BOJ stepping in to buy yen is technically speculative and implied. The timing coincides with Japanese policy to take advantage of existing moves in order to magnify the effect. The weaker US dollar as a result of increased speculation of Fed rate cuts meant that the exchange rate dropped, and Japanese authorities took advantage of the momentum.
That move was followed up the next day, with analysts calculating that the BOJ spent about 6 trillion yen in the move. The markets apparently thought that intervention was over, as the currency pair moved back towards the 160 once again on Tuesday, only to be hit again by a drop of over 200 pips over the course of around two hours. Once again, the move was a continuation of weakness that had started in the late trading hours of Tuesday (Japanese time).
So, Now What?
The moves by Japanese officials have left the market a little confused, as it doesn’t appear to be clear where the line is that will trigger a reaction. Officials had been warning of excess weakness in the yen in the lead up to the intervention. But that is a constant backdrop to the yen, these days. The constant interventions also make it hard for market participants to judge the currency, and markets hate uncertainty.
The irregular interventions suggest that the BOJ is not in a position to make a substantial move to shore up the currency. That would be raising interest rates. With inflation well above the central bank’s target, raising rates would be the logical thing to do, both to support the currency and bring down inflation. The fact that the BOJ hasn’t done it points to some technical issues, likely related to the huge amount of debt that Japanese banks carry at very, very low interest rates.
What to Look Out For
Tomorrow is the release of Japanese inflation data, which normally would affect expectations around monetary policy. But the complicated situation for the currency with the intervention makes it hard for markets to pre-position and react to the data. We could have a very irrational move in the yen following the data release.
Japan’s headline annual June CPI is expected to be unchanged at 2.8%, despite the monthly rate ticking moderating to 0.2% from 0.5%. The core rate, which is more closely tracked by the BOJ, is expected to actually increase to 2.6% from 2.5%.