The yen rebounded from near a 24-year low on signs the Bank of Japan is preparing an intervention to prop up the currency.
(Bloomberg) — The yen rebounded from near a 24-year low on signs the Bank of Japan is preparing an intervention to prop up the currency.
The central bank conducted a so-called rate check in the currency market, meaning officials called asking for an indicative price at which it could intervene, according to a person with direct knowledge of the events.
The yen was leading its Group-of-10 currency peers against the dollar, gaining as much as 1.4% against the dollar and bringing the dollar-yen currency pair back down to 142.81 as of 11:40 a.m. in New York after nearly touching the 145 mark earlier in the session. A breach of 145 would bring 146.78 into play, the level reached before a joint Japan-US intervention to support the yen in 1998.
Japanese authorities have been stepping up verbal warnings with the yen down almost 20% against the dollar this year, but these have failed to turn the tide. The actions on Wednesday, which included stern comments from both the finance minister and the nation’s top currency official, come as traders question how effective any intervention would be, especially if it was unilateral and without the backing of the US.
“While the rate check report probably is a precursor to actual intervention, it isn’t likely to lead to an immediate action and is just a hearing and an extension of verbal intervention,” said Akira Moroga, manager of currency products at Aozora Bank in Tokyo.
When Yen Jawboning Isn’t Enough, BOJ Rate Checks Loom: Primer
Finance Minister Shunichi Suzuki said earlier in the session that Japan wouldn’t rule out any response if current trends continued and those options included stepping into markets, a warning he repeated later in the day.
Asked about intervention later, Suzuki said, “It’s not something we’ll give prior warning for beforehand. Normally we wouldn’t say whether we’ve done it or not either. But when we do, we’ll do it without hesitation, and swiftly.”
Rate Check
Suzuki declined to comment on whether the finance ministry had asked the BOJ for a rate check. Governor Haruhiko Kuroda refrained from talking to reporters about the weak yen after a panel on the economy on Wednesday afternoon in Tokyo.
A rate check by the BOJ serves as a warning for the market to avoid one-way bets. It usually happens when volatility increases and verbal intervention may not be sufficient.
The BOJ made the call after top currency official Masato Kanda had spoken at the start of the day, according to a person with direct knowledge of the event. In Japan, the finance ministry decides whether to intervene in the market and the central bank does the actual buying or selling. The Nikkei earlier reported the checks.
Still, economists say the chance for intervention is low. While Japan has more firepower in its foreign exchange reserves to prop up the yen than it did in 1998, analysts see little chance of Tokyo being able to turn the trend through intervention without US help.
“Although data suggest that positioning is not excessively short, the step-up in verbal intervention is probably an attempt to limit risks of currency speculation, rather than extreme discomfort with current levels of JPY weakness,” said David Alexander Meier, economist at Julius Baer.
Putting further pressure on Japanese officials Wednesday, the country’s benchmark 10-year yield hit the 0.25% upper limit of the central bank’s tolerated range. Earlier in the day, the BOJ had boosted its scheduled bond purchases once more in a bid to cap the rise in yields.
The impact of the stronger dollar wasn’t just confined to Japan, with officials across Asia busy trying to bolster their currencies. A tumble in South Korea’s won sparked comments from officials there that they were closely monitoring markets. China extended its currency defense by setting its reference rate for the yuan with the strongest bias on record.
Japan’s currency has tumbled this year due to widening policy differentials. Tuesday’s US inflation data reinforced bets the Fed will raise its benchmark by 75 basis points at this month’s policy meeting, while the BOJ is forecast to keep rates on hold at the end of its September gathering.
Options traders are beginning to look for protection against possible action. One-month risk-reversals for dollar-yen — a gauge of expected direction for the currency pair over that time frame — point to near-term downside.
How and When Japan Intervenes in Currency Markets: QuickTake
“The BOJ’s rate checks can be seen as adding weight to their ongoing jawboning efforts,” said Yanxi Tan, a FX strategist at Malayan Banking Berhad. “Despite the upside surprise in US CPI yesterday, such push-back efforts may help moderate the pace of dollar gains. There is now an increasing likelihood that the current dollar-yen uptrend may fail to breach the 1998 top near 147.66.”
(Updates quote and market pricing.)
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