(Bloomberg) — The yen rose 3%, its biggest gain in almost two years, following Japan’s intervention in the foreign exchange market after authorities issued a “final” warning to investors not to sell the currency.
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The country’s top foreign exchange official declined to comment on Friday, but a person familiar with the matter said the intervention was taking place. Japan’s Nikkei newspaper had previously quoted a government official as saying that the government was buying yen and selling dollars. Some traders and strategists also said that the suddenness of this move indicates action.
Economic officials in the United States were notified before Japan’s intervention, according to a person familiar with the matter. This effort is in line with the Group of Seven agreement to warn counterparts and act only when there is a risk of extreme volatility.
The yen hit its strongest level since late February at 155.57 per dollar on Thursday and pared gains around 157.10 in Asian trading on Friday morning.
Until the government stepped in, the currency was trading near its weakest levels in four decades and was at risk of faster inflation by making imports, including already rising oil, more expensive.
In Tokyo late Thursday, Atsushi Mimura, the country’s top foreign exchange official, said he had “one last piece of advice if you want to run” to speculators and echoed Finance Minister Satsuki Katayama’s comments that “the time for bold steps is near.”
“This was an alarm bell moment,” said Neil Jones, managing director of foreign exchange sales and trading at TJM Europe. “In my opinion, the Ministry of Finance has instructed the Bank of Japan to sell the dollar against the yen.”
Next Steps
Market watchers are now turning their focus to the authorities’ potential next steps. In total, Japanese authorities spent about $100 billion to buy yen on various occasions in 2024.
“The BOJ’s aggressive intervention in 2022 and 2024 led to a significant correction in the dollar’s strength but required multiple yen purchases,” said Shaun Osborne, head of currency strategy at Scotiabank.
ING’s Chris Turner said the most important thing to watch regarding intervention is whether the United States will join Japan’s efforts to support the yen; This move could be seen as sending a stronger signal to speculators.
“Given high energy prices and the fact that Japan is running significantly negative real interest rates and the dollar is in demand, Tokyo cannot expect a sustained decline in dollar-yen terms,” said Turner, head of global markets at ING. “But what will really matter will be whether the US Treasury will get involved.”
According to the Richmond Fed’s website, the United States has intervened in foreign exchange markets only three times since 1995; The most recent of these interventions took action to prevent the yen from gaining value after the earthquake in Japan in 2011.
U.S. Treasury representatives did not respond to a request for comment.
In February, the Fed confirmed that its trading desk in New York had solicited quotes on the dollar-yen exchange rate on behalf of the US Treasury the previous month; This move briefly boosted Japan’s currency.
Fixed Odds
Before its sudden rise, the yen had weakened above 160 per dollar. This follows the Bank of Japan and Federal Reserve’s decision this week to keep interest rates steady. The US advantage over Japan’s benchmark contributed to the dollar’s strength against the yen.
Some strategists have cited BOJ Governor Kazuo Ueda’s reluctance to signal a rate hike in the near term as another weight on the yen, although his decision to keep interest rates steady has been divided this week.
What do Bloomberg strategists say?
“Yen intervention is a bit like fighting against the wind. Authorities can move the currency sharply if they want, but rate expectations will continue to cause the yen to weaken against the dollar.”
—Sebastian Boyd, macro strategist. Click here for the full analysis.
Tensions in the Middle East and rising oil prices are also hurting the yen, given Japan’s dependence on fuel from the region. Brent crude oil surpassed $126 per barrel on Thursday, its highest level since Russia’s invasion of Ukraine in 2022.
“At a time when the economy is gaining momentum, we are facing an oil price shock, which is a big problem for Japan, which is now an oil importer,” Sophia Drossos, a strategist and economist at Point72 Asset Management, told Bloomberg Radio on Thursday. “In this context, currency weakness is much more harmful.”
While Japanese officials have been concerned about the impact of deflation rather than inflation on their stagnant economy for years, they have become more concerned about rising prices following the pandemic shock. They recently began examining speculative trading in crude oil futures and said it has become a new factor driving currency movements.
“Our focus is on all fronts and that has not changed,” Mimura said on Thursday, while declining to comment on specific drivers of the yen’s recent weakness.
Brent Donnelly, president of Spectra Markets, said the drop in oil on Thursday following the rise in the yen could be the result of investors holding correlated positions in the two markets.
“If you’re betting on oil higher, you’re probably short the yen, and when you get smoked on the yen side, you sell your oil futures,” he said.
–With assistance from Takashi Umekawa, Saleha Mohsin, Anya Andrianova, Molly Smith, Erica Yokoyama, John Cheng, Ye Xie, Daniel Flatley, and Georgia Hall.
(Updated upon intervention, with approval from the source in the second paragraph.)
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