Yen "will not find long-lasting support" unless BoJ changes track

(Alliance News) - Japan's finance ministry intervened in the currency market on Thursday to bolster the yen, which has plummeted against the dollar in recent months on the widening policy gap between the US and Japanese central banks.

Analysts, however, were dubious about whether the move would be effective if the Bank of Japan continued to stick with a decade-old policy intended to achieve sustained 2% inflation. Until very recently the inflation rate in Japan had remained well below 2%.

"The key question is: will the intervention be effective to significantly support the yen, given that the [Bank of Japan] is effectively at odds with the government?" asked Fawad Razaqzada, market analyst at City Index and FOREX.com

The intervention - the first government intervention to prop up the currency since 1998 - came after the Bank of Japan left its ultra-loose monetary policy unchanged on Thursday.

The policy decision sent the dollar surging to a high of JPY145.9, a level which CMC Markets' Michael Hewson said the Bank of Japan "seems keen to defend at the moment given that last week's rate check happened around similar levels."

Earlier this month, the central bank reportedly conducted a "rate check", an operation often seen as a precursor to a currency intervention after the dollar came close to pushing above the psychologically significant JPY145 barrier.

Thursday's market intervention helped stem the weakening of the yen, with the dollar now trading down at JPY141.94 on Thursday afternoon. However, analysts questioned whether the action will make any sustainable difference to the yen.

"It probably will in the short term, as it will flush out any weak long US, short yen positions, which means we could see a move through the 141.00 area and a move towards 140.00," Hewson explained.

"If the Japanese authorities want to press home their advantage, they might want to consider intervening further over the next few days in order to drive the US dollar below 140.00. This will be tough to do with current monetary policy settings which are set in the opposite direction of today's intervention on the markets," he continued.

The Bank of Japan's steadfastness on monetary policy has widened the gulf between Japan and other major economies, where central banks – particularly the US Federal Reserve – are hiking rates to tackle inflation.

Inflation in Japan is rising, with core consumer price in August at 2.8%, its highest level since 2014. Despite this, the central bank has said repeatedly it views the increases as temporary.

The bank said it sees Japan's economy as on a recovery path, "with the impact of Covid-19 and supply-side constraints waning", though it warned of uncertainty from commodity price increases linked to the war in Ukraine.

"Typically, during periods of equity market volatility and global economic uncertainty like this year, the yen catches a bid, appreciating thanks to safe-haven demand," explained Victoria Scholar, head of investment at interactive investor.

"However, it hasn't been carrying out its usual function as a beneficiary of the 'flight to safety' trade because interest rate differentials have favoured other currencies instead such as the US dollar, stunting traders' bullishness towards the yen," Scholar continued.

Analysts suggested that, once the dust has settled on Thursday's intervention, the yen could once more move up towards JPY145.00 or JPY150.00.

"Until the BoJ changes tack, or the Fed stops hiking, the yen will not find long-lasting support," Fawad Razaqzada concluded.

Danske Bank agreed: "If the BoJ does not adjust monetary policy, then it may be difficult to prevent the yen from weakening again, and then we could quickly be back in a situation with a record weak yen again."

By Heather Rydings; [email protected]

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