Japan’s Fourth Yen-Buying Intervention: Why Market Maneuvers Alone Won't Stop the Yen’s Slide

TradingKey - During the Asian midday session on Wednesday, May 6, the yen surged sharply once again, with USD/JPY briefly touching 155.04, the yen's strongest level since February 24, as intraday gains reached 1.8%. Meanwhile, the U.S. Dollar Index fell below the 98 mark, hitting a low of 97.89, down 0.5% for the day.

The market interpreted this sharp yen rally as a signal of renewed intervention by Japanese authorities. Japanese media have confirmed that the government implemented foreign exchange intervention measures after the yen fell past the 160 level on April 30.

Japan’s New Line of Defense for FX Intervention: USD/JPY 157

While Japanese officials have not officially confirmed the aforementioned operations and the Ministry of Finance did not respond to requests for comment during non-working hours on a national holiday, there remains a possibility that Japanese authorities conducted foreign exchange intervention today.

National Australia Bank strategist Rodrigo Catril noted that USD/JPY gapped lower at the open, showing all the hallmarks of intervention. Investinglive analyst Justin Low said that today is a Japanese market holiday, and Japan's previous two intervention attempts also occurred during the window between the Asian session and the start of European trading.

Catril pointed out that the Japanese Ministry of Finance aims to both prevent the yen from depreciating toward the 160 level against the dollar and send a warning signal to speculative short sellers.

How many more times can Japan intervene?

Japan conducted three foreign exchange interventions on April 30, May 2 (Friday), and May 4 (Monday). Bloomberg analysis indicates that the total scale of these three previous interventions by Japanese authorities is estimated to exceed $54 billion.

Goldman Sachs analysts pointed out that, based on the scale at the end of April, Japan's current reserves could support 30 operations of the same magnitude. Officials from Japan's Ministry of Finance noted that, according to International Monetary Fund (IMF) guidelines, if Japan wishes to maintain its free-floating exchange rate status, it can only conduct two more three-day intervention actions through November.

Furthermore, Low believes another issue to consider is how much capital Japanese authorities must deploy for the intervention to be truly effective. He stated that the greatest hope currently held by Japanese officials is for the U.S.-Iran conflict to subside. As long as the conflict continues to drive up oil prices and elevate Japan's import costs, the yen's depreciation will be difficult to reverse.

Effectiveness of Japanese government FX intervention diminishes.

Analysis suggests that the effectiveness of Japan's three rounds of foreign exchange intervention has been diminishing. Bloomberg analysis noted that Japanese authorities deployed roughly $34.5 billion to support the yen on April 30, causing the currency to immediately rebound from the 160 mark to near 155. However, in the two subsequent interventions, the yen strengthened only briefly after each move before retreating.

Naka Matsuzawa, a macro strategist at Nomura Securities, pointed out that the effects of Japan's intervention will not be sustained unless three conditions are met simultaneously: support and coordination from the U.S. Treasury, the BOJ laying the groundwork for a June rate hike, and Sanae Takaichi's willingness to shift policy direction.

Specifically, Matsuzawa believes that if the BOJ's pace of rate hikes is slower than expected, downward pressure on the yen will continue to accumulate. Furthermore, it requires Japanese Prime Minister Sanae Takaichi to prioritize curbing yen depreciation and support the BOJ in pushing interest rates toward a neutral level. However, Matsuzawa remarked that 'Japan currently appears not to have even taken the first step.'

Additionally, Matsuzawa raised another question: Is the Japanese government's intent for this round of intervention to correct the yen's excessive depreciation, or is it merely waiting for Middle East tensions to ease and energy trade to normalize? He believes that if it is the latter, the risk of 'sell Japan' trades staging a comeback before June will rise significantly.