The Japanese Yen And Intervention Jitters

If you are into financial news, it’s likely that on October 4th you read about how some market analysts were suspecting a possible Japanese government intervention to help the Japanese yen strengthen. Interventions in the currency markets related to such large economies are not usual and certainly not an event that financial media could skip.

What happened and why? Read our article to learn more about the history of currency market interventions related to the Japanese yen and the reasons behind them. In addition, we’d like to note that past performance is not an indicator of future results.

Japan Refuses to Disclose Information Regarding Potential Intervention In FX Market

On October 3rd the Japanese yen weakened further, trading slightly above the mark of JPY 150.00 against the US dollar, hitting its lowest level recorded in the last 12 months. However, the Japanese currency reacted in the next session by strengthening by almost 2% and bringing the USD/JPY exchange rate to JPY 147.30.

The yen’s quick rebound made many currency analysts suggest that the country’s finance ministry played a role by intervening in the FX market to boost the currency’s value. Analysts at UBS speaking to Reuters reporters said that “them stepping in here would be perfectly consistent with recent warnings from top officials and past behaviour. Authorities may be unable turn the trend in FX markets immediately. Yet entering the market in size provides a strong signal and helps buy time for other things to fall into place that in the fullness of time then contribute to position unwinds.”

When financial reporters asked Japan’s Finance Minister Shunichi Suzuki if an intervention had occurred, he said that he didn’t want to “comment on whether Japan intervened in the FX market.” Suzuki stressed that rapid movements in the currency market are undesirable, adding that stability is important. Japan’s Finance Minister didn’t rule out any options against excessive moves and reiterated that currency exchange rates should be set by the market.

It should be noted that Suzuki mentioned that “we have only taken steps that have the understanding of US authorities.” Some days ago, the US Treasury Secretary and ex-Fed head Janet Yellen had said that the US approval regarding Japan’s interventions in the currency market would depend on the details of the situation.

The Japanese Yen And Intervention History

If an intervention in the currency market took place indeed, this wouldn’t be the first time for Japan. However, it is not a routine tactic either. During the Asian financial crisis (1997-1998), Japan intervened directly in the foreign exchange market to support the yen, when the exchange rate between the US dollar and the Japanese currency reached JPY 148.00 in August 1998.

More than a decade later in 2011, the Japanese government and the Bank of Japan rushed to sell the Japanese yen in forex markets as the currency had gained way too much ground against its US counterpart, trading at JPY 82.87, a 15-year low.

At the beginning of September (Sept 7th) 2022, Japan’s government and the central bank expressed their concerns over the weakening of the yen due to “rapid, one-sided" moves in the forex market. Two weeks later, the BoJ’s decision to maintain ultra low interest rates resulted in a new intervention in order to keep the yen’s value close to accepted levels. However, that was not enough as in October the USD/JPY pair traded at 151.94, the lowest level recorded in the last 32 years.

Why Would Japanese Authorities Intervene In the Forex Market?

It is no secret that the global financial market has been affected by the tightening of monetary policies implemented by the large central banks around the world. The Federal Reserve has led the way by increasing its borrowing costs to levels not seen in decades with the Bank of England and the European Central Bank following suit.

The Fed’s policy has strengthened the US dollar against its major competitors. While economists had suggested that pausing raising rates could lead to rate cuts next year, data coming from the labour market and core inflation indicate that the US central bank could maintain rates at this high level for longer than initially expected.

On the contrary, the Bank of Japan (BoJ) still implements a loose monetary policy in line with previous years with inflation still being low, but above the BoJ’s 2% target, when compared to other major economies. However, the strength of the dollar and the weakening of the yen have made Japanese companies and consumers complain as firms have transferred production lines overseas and the cost of importing goods has risen.

Supporting the Japanese yen is a costly decision. A Reuters report suggested that Japan holds $1.3 trillion in foreign currency reserves. Strengthening the yen would require spending a part of the reserves which could lead to the following question: How much would Japan be willing to spend to support its currency?

Risk Management When Trading The Japanese Yen

As you start trading there is one thing that you really should take into consideration: trading involves risk. Being a beginner trader, you probably won’t have the necessary background and knowledge to judge the right course of action when trading. Also, your reflexes and understanding of the trading environment may not be up to the requested standards. But you shouldn’t be disappointed.

Studying the ways trading works and having access to the right risk management tools could be a good starting point for beginner traders. A wide range of educational materials related to trading such as e-books, how-to guides, videos are available online, giving beginner traders the opportunity to learn more and get answers to their questions.

When it comes to risk management tools, there is no doubt that beginner traders should incorporate them into their trading strategies. Thanks to these tools you can execute strategies and set limits that could put a strain on potential losses without you being in front of your screen. Studying how risk management tools work is imperative for any beginner who starts exploring the world of trading as it could protect your funds and relieve you from excessive stress.

Does trading on macroeconomic news interest you? Learn how this approach works with our free webinars. Meet and interact with experienced traders. Watch and learn from live trading sessions.

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.