FX traders are once again on yen intervention watch.
The Japanese currency on Wednesday weakened through levels where officials stepped in nearly a year ago, raising the specter of another market foray by the finance ministry.
Last September, a relentlessly strong dollar, a determined Fed and a recalcitrant Haruhiko Kuroda conspired to put enormous pressure on the yen, eventually compelling the government to intervene on the currency’s behalf for the first time since 1998.
On Wednesday afternoon in the US, following the release of minutes from the July FOMC meeting, USDJPY rose to 146.41, above the 145.90 level where Japan spent nearly $20 billion to arrest the slide 11 months ago. Authorities subsequently intervened twice more in late October.
Ultimately, it was a cool US inflation report (the October figures which, when released in November, sparked a steep dollar selloff) which finally gave the yen some durable respite.
Remember: 10-year JGB yields are still subject to a ceiling despite the BoJ’s transition to a “flexible” yield-curve control regime last month.
Although Japanese yields can now theoretically rise to double the level permitted under Kuroda, 1% is a “strict ceiling.” With long-end US yields biased higher of late, rate differentials are moving in favor of the dollar.
The figure shows nominal yields. Real rate differentials are obviously skewed heavily in favor of the greenback as well.
There are mitigating factors that may argue against intervention. For one, the rapidity of the move might not be deemed especially worrisome, even if the Japanese finance ministry resorts to urgent-sounding rhetoric in a bid to talk the market back.
Additionally, the yen isn’t the only currency that’s weaker against the dollar lately — the yuan is trading near the weakest in 16 years, which is relevant here. Finally, the Japanese economy is doing well (driven by exports, which kind of begs the question in this context), and the backdrop for crude is less concerning than it was last year, even as energy prices have rebounded in recent weeks.
In any event, this is something to watch. If USDJPY 150 isn’t a bridge too far, it’d certainly count as pushing the envelope. Beyond that level, it wouldn’t be surprising if Japan pushed back.
