Notes on the Japanese Yen Intervention

Japanese authorities are reported to have intervened in the forex markets on the morning of May 2, 2024. This follows a substantial intervention on April 29, 2024, where they purchased over ¥5 trillion. This is in continuation of a series of forex market interventions, including a notable intervention in October 2022.

This morning the JPY is giving up some of its strength. The USD/JPY pair is reversing higher. The USD Index (DXY) is also weaker this morning which makes the move in the USD/JPY all the more interesting.

We can’t say where it goes from here. With the US possibly keeping rates higher for longer, we may see continued strength in the US Dollar.

Here are some notes on the sustainability of the Yen Intervention and a few things to consider:

• Analysis of Intervention Scale and Sustainability:

  • Past Interventions as Reference: The interventions in 2022 totaled ¥9.18 trillion across three occasions. The largest of these occurred on October 21, 2022, with a purchase of ¥5.62 trillion.

  • Potential Thresholds of Concern: There is increasing concern about the sustainability of Japan's forex interventions. Market analysts suggest that alarm bells might start to ring if the total amount of interventions reaches approximately ¥9-13 trillion.

• Foreign Exchange Reserves: As of the end of March 2024, Japan's foreign exchange reserves stood at $1,290.6 billion. Despite a significant intervention of $34 billion on April 29, which constitutes about 2.7% of total reserves, Japan maintains a robust reserve capable of supporting further interventions if necessary.

• US and IMF Considerations:

  • US Treasury Reports: These reports focus on "persistent, one-sided intervention" as a criterion for currency manipulation, examining both the frequency and the size of interventions relative to GDP. Japanese interventions may draw scrutiny if perceived as manipulative.

  • IMF Classifications: There's a common misconception regarding the IMF's restrictions on forex interventions. The IMF's focus is more on the frequency of interventions rather than their volume, and the classification system primarily sorts countries based on their forex intervention patterns.

• Market Reaction and Future Outlook:

  • Japan's approach includes using its substantial reserve assets, suggesting a continued capacity for market intervention.

  • The reaction of the US to these interventions is critical, as US policy responses could influence both the effectiveness and the international reception of Japan's forex interventions. Close attention is being paid to comments from US Treasury officials, which could indicate shifts in US policy or perspectives on Japan's forex activities.