BOJ Intervenes in Foreign Exchange Markets, but JPY Weakness Persists

The USD dominates in the foreign exchange market this year, as it rose to 144 against the JPY from the beginning of the year, while the JPY depreciated by 20%. In addition, the Japanese government has recently started frequent retrograde operations. First, many Japanese officials strengthened verbal interventions many times, but the Japanese Government did not take actual actions to intervene in the foreign exchange market under the effect of profit taking. Consequently, the market did not seem to buy it, and the JPY continued to weaken. 

It is more puzzling that on September 21st, the BOJ announced that it planned to carry out an unplanned bond purchase operation, purchasing 150 billion JPY of 5-10-year government bonds and 100 billion JPY of 10-25-year government bonds. To control the yield curve, the Japanese government has also taken great pains to manage the devaluation of foreign exchange while unscrupulously releasing currency, significantly confusing the market. After that, JPY depreciated again after the confirmation of the Fed rate hike, and USDJPY reached a new high of 145.

In the face of the falling JPY, a previous survey showed that economists generally expected that the BOJ would still maintain lower interest rates. Only when the JPY fell to 150 could the BOJ adjust its monetary policy. But this time, the Japanese government could not help but act without waiting for the depreciation to 150, and it was a direct currency intervention. On September 22nd, the BOJ joined the market to buy JPY and started the first foreign exchange intervention since June 1998, which also exceeded market expectations. Is the Japanese government making a show? On the same day, the JPY quickly boosted by more than 500 points and returned to 140, which has been respected enough.  

There are only two options for intervening in the foreign exchange rate: direct intervention, and indirect intervention. The direct way is direct foreign exchange market trading, which consumes foreign exchange reserves, but it is also the fastest and most effective way in the short term. Besides, indirect ways include foreign exchange reserves and monetary policy. It is rare for Japan to choose a direct intervention in the foreign exchange market this time, making it easy to run out of bullets. Meanwhile, in historical experience, direct currency intervention is rarely successful, and can only be temporarily relieved (the decline of the JPY). 

The internal reasons for the JPY depreciation this year are very clear: first, the domestic monetary policy (policy interest rate differential), global inflation is high, and the currency has been tightened to varying degrees. Additionally, the United States is even more aggressive in raising interest rates, as the dot plot of the year has gone to the end of the year, the federal policy rate will reach 4-4.25%, and the 10-year US Treasury bond yield will be 3.75%-4% by the end of the year. However, Japan continues to move backward, and its monetary policy continues to remain loose, putting money in and controlling the yield curve. On September 22nd, the BOJ announced that it would maintain the policy interest rate at -0.1% and maintain the 10-year Japanese government bond yield target at around 0%. Moreover, it would maintain the forward guidance of interest rates unchanged, and it demonstrated that, if necessary, it will not hesitate to increase the easing. Japan is still retrograde even knowing that the continued decline of the JPY will push up import costs and suppress consumption, probably because Japan's inflation is not high (August CPI was 3% YoY, a new high in 21 years) compared with other countries in the world. The situation is a bit like China. Of course, there is also the helplessness of economic weakness.

Second, the current difference in economic fundamentals between Japan and the United States is the core factor. The "Nikkei Shimbun" quoted the prediction of the Organization for Economic Cooperation and Development (OECD) that Japan's nominal GDP this year will probably be 553 trillion JPY. If calculated at 1 USD to 140 JPY, it is 3.9 trillion USD, which is less than 4 trillion USD for the first time in 29 years since 1992. Also, if the JPY continues to depreciate or remains low, it could fall below 4 trillion USD this year and next. In other words, the size of the Japanese economy has returned to the period when the bubble economy collapsed at the end of the last century. comparatively, in the United States, although there is an expectation of an economic recession under the aggressive shrinkage of the balance sheet and interest rate hikes, the GDP growth rate in the first half of the year is still very strong, with a half-year growth rate of 3.5%, ranking first in the world, but also about 1% higher than before the pandemic. Furthermore, the August data still shows no clear signs of recession, and all above exhibit the comparison between the United States and Japan.

In general, the above two points are difficult to be improved in the future. Japan's direct currency intervention can only intervene in the depreciation of the JPY, but it will eventually fail. It is a matter of time. The focus is not on the above issue but on what will happen after Japan's foreign exchange intervention fails. It is difficult to give up the monetary easing policy, but will it give up the yield curve control? If it does, it may allow capital to flow back and play a certain role in restraining depreciation.