Japan has once again launched a 'currency war'.
On July 16th, according to Bloomberg data, a comparison between the Bank of Japan's current account data and currency broker valuations showed that Japanese authorities may have intervened in the market last Friday to support the yen exchange rate. Comparison shows that the intervention scale may be around 214 trillion yen (approximately 98 billion yuan).
At the same time, Japanese Chief Cabinet Secretary Lin Fangzheng recently stated that Japan is ready to take all possible measures to deal with excessive currency fluctuations, keeping the market alert to the possibility of re intervention to support the yen. The Japanese authorities will closely monitor exchange rate developments and be ready to take all possible measures at any time.
Currently, the market is more concerned about whether the Japanese authorities will take follow-up actions if the impact of the latest intervention measures is proven to be short-lived. The market generally expects that the Bank of Japan may announce another interest rate hike at the interest rate decision to be held at the end of July, which may be the second interest rate hike since 2007. Analysts believe that if the central bank raises interest rates by 15 basis points, it may push the yen against the US dollar up by 2-3 yen, but raising interest rates alone may not be enough to change the downward trend of the yen exchange rate.
Japan takes action
On July 16th, according to Bloomberg data, a comparison between the Bank of Japan's current account data and currency broker valuations showed that Japanese authorities may have intervened in the market last Friday to support the yen exchange rate. Comparison shows that the intervention scale may be around 214 trillion yen (approximately 98 billion yuan). The Bank of Japan predicts that due to government fiscal factors, its current account may decline by 2.74 trillion yen on Wednesday.
Reflected in the foreign exchange market, the yen against the US dollar continued to rise for two trading days, with a surge of nearly 3% last Thursday, marking the largest daily increase since the end of 2022. The yen also strengthened against other currencies across the board. As of press time, the exchange rate of the US dollar against the Japanese yen has fallen to 158.44, a cumulative decrease of 2.2% compared to the high point in early July (162.01).
On July 16th, Yoshimasa Hayashi, the Chief Cabinet Secretary of Japan, stated that Japan is ready to take all possible measures to deal with excessive currency fluctuations, keeping the market alert to the possibility of re intervening to support the yen.
Lin Fang stated at a regular press conference that it is important for currency exchange rates to reflect fundamentals in a stable manner. Excessive fluctuations are not advisable.
He said, "We will closely monitor the development of the exchange rate and be ready to take all possible measures at any time
When asked if Tokyo intervened in the currency market for two consecutive days last week to support the yen, Lin Fangzheng refused to comment.
The background of the Japanese authorities' intervention to "rescue the market" at that time was that the United States released the latest CPI data, which showed that the US inflation rate had cooled down comprehensively, and the expectation of the Federal Reserve cutting interest rates had risen, leading to a sharp drop in the US dollar index.
Analysts pointed out that after the release of June CPI data in the United States, the Japanese government seized the opportunity of the weakening of the US dollar index to intervene, which could boost the yen with a "rescue" scale lower than the approximately 4 trillion yen in May.
Shinichiro Kobayashi, Chief Economist of Mitsubishi UFJ Research Consulting, said that the timing of the intervention was unexpected, and the Japanese authorities wanted to show that they have many ways to intervene, although the effect is not significant.
In fact, on the day of the Japanese authorities' bailout, the market had already sensed intervention. According to data from the Chicago Mercantile Exchange Group, last Thursday was the busiest day for yen spot trading since November 2016, further proving the Japanese government's intervention.
Japanese media also reported that the Japanese government and the Bank of Japan implemented currency intervention for two consecutive days from July 11th to 12th. In response to this, Vice Minister of Finance of Japan, Shinobu Kanda, said at the time, "If the authorities intervene today, we will disclose it at the end of the month
The Japanese government has been trying to reverse the decline of the yen exchange rate. Earlier this year, after the Japanese yen fell to a 34 year low against the US dollar, the Japanese government spent a record 9.8 trillion yen in intervention actions at the end of April and early May to support the yen exchange rate.
Pressure from the Bank of Japan
Currently, the market is more concerned about whether the Japanese authorities will take follow-up actions if the impact of the latest intervention measures is proven to be short-lived.
The market generally expects that the Bank of Japan may announce another interest rate hike at the interest rate decision to be held at the end of July, which may be the second interest rate hike since 2007.
According to sources, the Bank of Japan may lower its economic growth forecast for this year in July, but it is expected that inflation will remain near its target of 2% in the coming years, thus maintaining the possibility of a rate hike this month.
Yujiro Goto, head of foreign exchange strategy at Nomura Securities, said that if the yen continues to weaken before the July meeting, the Bank of Japan may need to consider raising interest rates early, even when deciding to reduce the pace of bond purchases.
He believes that if the central bank raises interest rates by 15 basis points, it may push the yen against the US dollar up by 2-3 yen, but raising interest rates alone may not be enough to change the downward trend of the yen exchange rate.
Barclays Bank also predicts that the Bank of Japan will raise interest rates by 15 basis points this month, but believes that this will have limited impact on the currency. Mitul Kotecha, head of macro strategy for Asian foreign exchange and emerging markets at the bank, said, "Although the weakening of the yen has raised expectations for the Bank of Japan to raise interest rates this month, we believe that the yield gap between domestic and foreign markets is too large to sustain a reversal (of the yen depreciation trend)
But after direct intervention by the Japanese authorities in the foreign exchange market, market expectations for the Bank of Japan to raise interest rates have decreased. According to swap market data, the probability of the Bank of Japan raising interest rates by 10 basis points in July has decreased from 59% to 51%.
Analyst Jeremy Boulton stated that the Bank of Japan is unlikely to make significant policy adjustments at its interest rate meeting at the end of July. Ending bond purchases is a distant prospect, although the scale of bond purchases will be reduced in July, the yen will still be affected by future bond purchases. Due to so many traders and investors shorting the yen, policy adjustments may support the yen in the short term, but as bond purchases continue, the yen may continue to decline.
The current market is still mainly bearish on the Japanese yen. According to the latest weekly data from US regulatory agencies, speculators hold short positions in the yen worth $14.26 billion (approximately RMB 103.5 billion), close to the six-and-a-half-year high in April this year.