Traders speculate on intervention as yen slumps, then rises

(Alliance News) - The yen raced above JPY150 on Friday, and was perilously close to hitting JPY152, as the currency continues to come under pressure as the Bank of Japan refuses to budge from its ultra-loose monetary policy.

However, it regained some poise as the evening dragged on, as currency traders mull whether there will be another forex intervention to prop up the yen.

While other central banks have opted to hike interest rates to fight soaring inflation, the BoJ views the current price increases as linked to exceptional events such as the war in Ukraine.

It has stuck with its ultra-loose monetary policy and resisted hiking rates, arguing that the world's third-largest economy has yet to reach the 2.0% inflation target it views as necessary to turbocharge growth.

Against the Japanese currency, the dollar advanced to JPY151.56 on Friday afternoon in London from JPY149.88 on Thursday - hitting prices it has not seen since early 1990.

Oanda analyst Craig Erlam said: "The Bank of Japan was active again overnight as it sought to stop the yield on the 10-year JGB from breaking above its 0.25% upper band.

"This is the second day it has conducted unscheduled purchases in response to market pressures, piling further misery on the yen which has smashed through 150 against the dollar. There's still no intervention though from the Ministry of Finance though despite more warnings overnight."

Adding further pressure, Japan's core consumer prices rose 3.0% in September on-year, the government said Friday, the highest level since 2014 as the falling yen and rising energy costs hit households hard.

The data, which excludes volatile fresh food prices, brings inflation well above the Bank of Japan's long-term 2.0% goal.

But excluding energy prices, the figure stood at only 1.8%, bolstering the central bank's argument that current increases do not yet meet its standard for sustained price growth.

Fawad Razaqzada, market analyst at City Index and FOREX.com, said: "The USD/JPY is finding continued buying pressure on any dips because of the big divergence in US and Japanese monetary policies. The Fed is hiking and aggressively so, while the BoJ has remained the only major central bank not to drop its ultra loose monetary policy despite the global inflation upsurge. For the USD/JPY to go down, the BoJ will have to change tack. Otherwise, the buying pressure should keep the downside very limited in this macro environment.

"The Japanese government can burn all the dollar reserves it has but buying the yen will only be a temporary fix. Every time it has stepped in, the USD/JPY has repeatedly resumed its bullish trend after bouts of JPY strength quickly fizzled out."

The government has previously said it is monitoring the situation as a matter of urgency.

"It seems the urgency with which they're monitoring the situation isn't in fact that urgent at all," Oanda's Erlam said.

"Although considering how ineffective the last intervention was, they may be wondering what exactly the correct policy response is. Sitting and waiting for the dollar to fall isn't working either though. And it seems the BoJ is in no mood to tweak its yield curve control targets, despite inflation remaining at 3% and core rising to 1.8%."

Razaqzada said the BoJ is letting the yen to devalue by keeping its yield curve control in place.

"It does so by purchasing JGBs with huge amounts of freshly printed yen. In effect, it is supplying the yen that the government is trying to soak up from the market. Hardly surprising then that the government’s interventions have proved to be futile," he added.

As the US session dragged, the yen was fighting back. It was quoted around JPY147 about 1800 BST.

Saverio Berlinzani, senior analyst at ActivTrades, said the push back has come due to a probable intervention by the BoJ - but stressed neither the central bank or government have officially confirmed yet.

"It is clear that without support it would have been almost impossible to witness such a movement. The BoJ wants to halt a too rapid descent of the local currency, and the intervention takes place on the day in which from the opening of 150 it had risen over 1%, forcing the monetary authorities to intervene. At this point, expect statements to curb further falls in the currency."

The Bank of Japan will review its interest rates on Friday.

By Paul McGowan; [email protected]

Copyright 2022 Alliance News Limited. All Rights Reserved.