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Japan Intervention Would Target 5-Yen Rally, Strategists Say

Japan Intervention Would Target 5-Yen Rally, Strategists Say

(Bloomberg) -- Japanese authorities would probably target a five-yen rally against the dollar if they decide to intervene in foreign exchange markets, according to strategists at some of the country’s biggest brokerages.

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Officials have ratcheted up their warnings against speculative moves in the yen, which reached the weakest level in about 34 years against the dollar last week. The currency has slipped beyond levels that prompted authorities to enter the market in 2022 to support the yen for the first time since 1998.

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“Should authorities use several trillion yen to intervene, like they did in 2022, that may amount to operations to boost the yen’s value by four to five yen per dollar,” said Yujiro Goto, head of Japan currency strategy at Nomura Securities Co.

Finance Minister Shunichi Suzuki said last week that the government is willing to take “bold measures against excessive moves.” He reiterated Tuesday that the government will take appropriate measures, without ruling out any options. But there’s skepticism in the market on whether intervention would be able to keep the yen strong for long, considering that a wide yield gap between US and Japanese bonds has pressured the currency to weaken.

The first interest-rate hike last month by the Bank of Japan since 2007 did little to narrow that differential, which shows US Treasury yields about 3.5 percentage points higher than Japanese debt. Weakness in the yen appears set to continue unless expectations increase again of a Federal Reserve rate cut. That leaves the onus on Japan’s Finance Ministry to try to prop up the yen if it continues to slide.

A Trader’s Guide to Japanese Policymakers’ Language on the Yen

Japan’s foreign-exchange reserves stood at $1.15 trillion at the end of February. About $175 billion of those are dollar funds that authorities can be use to intervene without selling long-term securities, according to an estimate by Goldman Sachs Group Inc.

The Ministry of Finance spent more than ¥9 trillion ($59 billion) in three occasions in September and October 2022. On its first intervention, the Japanese currency gained more than five yen to an intraday high of 140.36 per dollar compared with its low for the day.

“An intervention of about ¥1 trillion in size may lift the yen by slightly less than one yen per dollar when calculating based on the currency’s demand and supply conditions,” said Kenta Tadaide, chief currency strategist at Daiwa Securities Co. “They may want to see an appreciation of at least five yen.”

The risk of Japan intervening in the currency market will increase if the dollar climbs to the 152-155 yen zone or if one-month implied volatility rises above 10%, from around 8% now, Bank of America Corp. strategists Shusuke Yamada and Meghan Swiber wrote in note last month.

Why the Yen Is So Weak and What That Means for Japan: QuickTake

Still, intervention isn’t seen as being able to change the yen’s underlying long-term trend. After the government stepped into the market in 2022, the yen rebounded nearly 20% from an Oct. 21 low of 151.95 per dollar in three months before changing course again to drop to as low as 151.97 last week. The Japanese currency was close to that low Tuesday in Tokyo, trading around 151.72 per dollar.

“Intervention will have short-term impact by encouraging some position adjustment,” said Monex Inc. bond and currency trader Tsutomu Soma. “But the yen is likely to return to where it was over a course of a week or so.”

Cash at Fed Central Bank Tool Grows Amid Yen Intervention Talk

Also weighing on the yen are fund outflows by retail investors. Japanese purchases of overseas equities through investment trusts exceeded ¥1 trillion in the first two months of this year partly thanks to introduction of the nation’s new tax-exempt retirement savings system, known as NISA.

The bigger picture is that Japan’s investors and companies are parking more of their cash in higher-returning investments overseas. That can be seen in the basic balance, a broad measure of capital flows, at ¥2.2 trillion in deficit on a rolling six-month basis, according to a Bloomberg analysis of Japan’s balance-of-payments data.

It’s unlike when Japan last bought yen from the market in 2022, when the balance was in surplus of as much as ¥1.2 trillion, indicating the intervention was backed by underlying yen-buying flows. That may not be the case this time around.

“The fundamental problems for the yen’s weakness against the dollar include the low potential economic growth in Japan, fiscal deficit and structural issues with the trade balance,” said Mari Iwashita, chief market economist at Daiwa Securities Co.

--With assistance from Masaki Kondo, Kana Nishizawa, Paul Jackson and Masahiro Hidaka.

(Adds new comments from finance minister.)

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