TD on verbal intervention that we are currently seeing:
- Ministry of Finance (MOF) officials (e.g., Suzuki, Matsuno) repeated the JPY jawboning … in a warning to speculators that imminent intervention is on the table, especially with USD/JPY on a path towards 150.
And the politics behind the scenes playing out:
- The JPY weakness is taking a hit on Kishida’s popularity in the polls which probably nudged the government to unveil a new set of economic measures next week. We doubt authorities want media headlines on JPY weakness to overshadow the fiscal announcements, and lean towards them pulling the intervention trigger.
And, what to expect should the word be given to intervene by buying yen:
- If they intervene >150, watching 146.5 as first support before a retest of the psychological 145 level again – past intervention efforts usually have an initial effect of a 5 big-figure drop in USD/JPY.
Bank of Japan Governor Ueda seated with Japan’s finance minister Suzuki
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A note on the mechanics of intervention:
- The Ministry of Finance (MOF) in Japan is responsible for formulating foreign exchange policy in the country, while the Bank of Japan (BOJ) is responsible for executing such policies, particularly in terms of FX intervention.
- The MOF can decide to intervene in the FX market if it believes (in the current situation) the yen is too weak. Once the MOF decides to intervene, it gives instructions to the BOJ. The BOJ then conducts operations in the FX market by (in current circumstances) buying yen. The Foreign Exchange Fund Special Account (FEFSA), which falls under the jurisdiction of the MOF, is used for interventions. You will note that in the current situation, where the BOJ would buy yen, they will dip into USD reserves to fund the other side of the trade, buying USD (or other currencies if needed).
- The BOJ’s operations are usually conducted through commercial banks that deal in the foreign exchange market. They may be spot transactions, or forward transactions that are set to occur at a future date. Note that while the MOF has the ultimate authority to decide when to intervene, it does so in close consultation with the BOJ. The BOJ provides expertise and advice on monetary and financial market conditions, which can influence the MOF’s decision. This collaboration reflects the balance between the roles of the two entities: the MOF as the government’s chief financial and economic advisor, and the BOJ as the country’s central bank that maintains stability in the financial system.