Japan intervened to strengthen the yen for the first time since the late 1990s on Thursday, after the currency tumbled to a 24-year low on pledges by the central bank to stick with its ultra-loose policy.
Masato Kanda, the country’s top currency official, said the government had “taken decisive action” to address what it warned was a “rapid and one-sided” move in the foreign exchange market. It was the first time Japan had sold dollars since 1998, according to government data. Shunichi Suzuki, finance minister, declined to comment on the scale of the intervention.
The move, which traders said was conducted shortly after 5pm local time in Tokyo, caused the yen to surge to ¥142.39 to the dollar in the space of a few minutes.
In the currency’s most volatile day since the height of the coronavirus crisis in 2020, it had previously hit a low of ¥145.89 after the Bank of Japan signalled it would not change its forward guidance about interest rates. So far this year, the yen has lost about a fifth of its value against the dollar.
“It’s the next logical step of the psychological game the Japanese are trying to play here. The yen was heading very steeply to 146, and the [Japanese authorities] had to get a message out quickly. I think the idea is to plant the idea in the market that this is their line in the sand,” said one Tokyo-based trader.
The move to steady the yen cascaded across global currency markets. Both the pound and the euro swung into positive territory after starting the day lower.
The intervention also highlighted the powerful impact of a surging US dollar on the world’s biggest economies.
Japan is now the only country in the world to retain negative interest rates as the US Federal Reserve and most other major central banks aggressively raise interest rates to fight inflation. Hours after Japanese policymakers decided to hold their main interest rate at negative levels, the Swiss National Bank lifted its own rates into positive territory.
The Fed raised its main interest rate by 0.75 percentage points for the third time in a row late on Wednesday, forecasting further big rate rises — so lifting the bar for other central banks.
Because investor funds generally flow to regions with higher interest rates, a widening gap between the US and countries such as Japan puts upward pressure on the dollar.
But on Thursday the BoJ kept overnight interest rates on hold at minus 0.1 per cent. It said it would conduct daily purchases of 10-year bonds at a yield of 0.25 per cent — part of a programme to keep long-term borrowing costs pinned at ultra-low levels.
Japan’s core consumer prices, which exclude volatile food prices, hit 2.8 per cent in August, rising at the fastest pace in nearly eight years on the back of soaring commodity prices and the weaker yen.
The BoJ has long argued that the underlying demand in the Japanese economy remains weak, predicting that inflation will fall back below 2 per cent in the next fiscal year.
“You can expect that there will be no change to our forward guidance for about two to three years,” Haruhiko Kuroda, BoJ governor, said at a news conference, although he added that there could be minor tweaks depending on economic and price developments.
“With clear differences in economic and price situation, there is no need for Japan to remove negative rates because others have done so,” Kuroda added. He said the BoJ needed to continue supporting the economy with monetary easing measures until it fully recovered from the pandemic.
The BoJ also ended a scheme to offer cheap loans to banks financing small and medium-sized companies to survive Covid disruption, but unexpectedly extended other parts of its pandemic-related funding programme.
Citigroup economist Kiichi Murashima said that, even if the BoJ were to fine-tune its policy, it would not fundamentally change the broader picture of a gap in financial conditions between Japan and the rest of the world.
“It’s very questionable how far the government can actually avert the yen’s fall against the dollar.”
BoJ officials last week phoned currency traders to inquire about market conditions in a so-called rate check, illustrating the government’s alarm about the yen’s sharp fall against the US dollar.
Government intervention in currency markets, which is ordered by the ministry of finance and executed by the BoJ, is generally rare but especially so when it is conducted to strengthen the currency.
The authorities have deployed ¥86tn on intervention since 1991, of which ¥81tn was spent on selling yen, with the last time being in the shadow of the Asian financial crisis in June 1998.