It’s always been difficult. The Japanese Ministry of Finance knows very well that interest rates will rise against a staggering fundamental backdrop that dictates a devaluation of the yen. As the war between the US and Iran continues, there is no changing the fact that all influencing factors point to a weaker currency.
But not wanting to let things get out of their hands, they intervened last week to push the USD/JPY pair lower after breaching the 160.00 level. Once they showed their hand, there was no turning back now.
Last week’s moves did not have a strong enough impact, prompting the Finance Ministry to decide to intervene again this week. Frankly, I personally feel that this was a wrong move on the part of officials in Tokyo.
USD/JPY hourly chart
Just remember that Japanese markets were closed for at least half the week. However, they interfered on Monday at almost the same level as they did on Friday. They did this during hours of generally lower liquidity amid the shift from Asian to European trading.
The effect was not lasting again as traders bought USD/JPY around 155.50-70 levels. Ultimately, that led to another round of intervention on Wednesday. This time, the force was apparently stronger. However, a break above 155.00 was not enough to trigger additional stops on the way down.
Since then, even with the dollar falling, USD/JPY has returned to around 157.00 today. So, what gives?
The fact remains that the yen’s fundamentals remain very bearish. Even if the war ended today, it would take several more months for the oil market to return to normal. Meanwhile, high energy prices will persist and continue to weigh on the Japanese economy.
In addition, Takaishi’s trading is still ongoing in the background, and the Bank of Japan needs to balance its interest rate hike efforts with faltering economic conditions, which is difficult to be optimistic about. This is especially so since the Bank of Japan’s intentions to raise interest rates may also be postponed due to higher cost-induced inflation now. So, there’s a delicate balance to strike there as well.
Now when you take into account Japan’s desperation and ineffective intervention, it makes traders more emboldened in trying to punish the currency further.
I’ve previously explained why intervening in low liquidity conditions is a bad idea:
“It may seem counterintuitive not to want to act during periods of low liquidity, but there is nuance to it. The key thing in intervention is not so much about the money as it is about the signal. You want enough players in the market to pick up that signal and amplify it, so you get the idea that ‘we shouldn’t mess with the MOF/BOJ.’ Otherwise, that signal can get lost in translation if there is not enough liquidity to follow. And at the end of the day, it may be passed off as more noise than just a key signal.” Actual for traders.
For now, they continue to assert that they are still “in control” and even an IMF warning will not stop them. This is clearly a play on optics however After spending nearly $70 billionThey need to know that they can’t keep this up for very long before they need to delve deeper into their lives Huge war chest In terms of foreign currency reserves. Is it time to sell some Treasuries?
