On March 19, 2024, the Bank of Japan eliminated its negative interest rate policy. Initially it was assumed that this policy shift by the Bank of Japan would shrink the interest rate disparity between Japan and the U.S., and would trigger a correction to the depreciation of the yen. However, the weak yen trend only continued afterwards, to the point where on April 29 the yen briefly depreciated to the level of 1 USD/160 JPY. Subsequently, the government presumably embarked on two rounds of currency intervention by selling dollars and buying yen. For the time being, the dollar/yen exchange rate is easily influenced by changes in the economic indicators announced by the U.S., and it would seem that going forward the collaborative attitude between the government and the Bank of Japan aimed at halting the yen’s slide will be put to the test.

The 1 USD/152 JPY defensive line is broken

The dollar/yen rate has for the most part consistently followed a downward trend for the yen, from the level of around 1 USD/140 JPY seen at the beginning of the year. The Bank of Japan has been concerned that the ongoing depreciation of the yen could encourage prices to remain high, thus putting pressure on people’s lives and corporate activity.
At the time the government considered a rate of 1 USD/152 JPY to be its defensive line, and it seems to have been highly cautious about the yen’s depreciation beyond that line. The 1 USD/152 JPY level is close to the peak of the depreciation seen in 2022 and 2023. The fear was that if the yen continued to weaken past this milestone, the yen’s downward slide would gain even more momentum. Meanwhile, this was because the government also believed that if the depreciation of the yen could be halted at this level for a third time, that would serve as a baffle that would send the flow of foreign exchange back toward a stronger yen.
There’s also a strong awareness about the 1 USD/152 JPY level in the currency market, and for a long time the dollar/yen exchange rate was at a standstill right at the brink of 152 yen. However, once price indicators surpassing expectations were announced in the U.S., on April 10 (U.S. time), the yen slid further past 1 USD/152 JPY.

U.S. constraints on currency interventions, Monetary Policy Meeting led to further yen depreciation

What triggered the yen’s downward slide to pick up even more steam was a statement given by U.S. Treasury Secretary Janet Yellen on April 25 (U.S. time) about currency interventions, in which she remarked that “We would hope that would be rare, and expect that such intervention would occur only rarely, only with excessive volatility, and they would consult in advance”, with this statement placing major constraints on such currency interventions by the Japanese government.
The U.S. government considers it to be undesirable for developed nations to carry out currency interventions. This is because it believes that in the first place, foreign exchange rates ought to be determined by the markets, but its concern is also that if developed nations were to make frequent interventions, that would lead developing nations to follow suit with their own active interventions, which would significantly distort exchange markets and cross-border capital flows.
It’s been speculated that Secretary Yellen’s remarks have made it more difficult now for the Japanese government to go through with a currency intervention. Furthermore, at a press conference following the Monetary Policy Meeting that was held on April 26, BOJ Governor Ueda made no statements about containing the depreciation of the yen, and this led market expectations about the collaboration between the government and the Bank of Japan to prevent the yen’s downward slide to dim significantly, resulting in further weakening the yen’s value.
Having hovered at around the low 1USD/155JPY range prior to the MPM, the dollar/yen exchange rate subsequently weakened further in the Tokyo market, to as far as the 1 USD/156 JPY level. The yen’s downward trend only continued that same day in overseas markets, and ultimately it closed even lower in the U.S. market at the level of 1 USD/158 JPY. In just 24 hours it had rapidly declined by around 3 yen.

Did the government go through with two “masked interventions”?

In the early morning hours of April 29, during Japan’s long Golden Week holiday, the dollar/yen exchange rate temporarily worsened to the level of 1 USD/160 JPY. One conceivable reason for this was that because it was a holiday in Japan, there was diminished concern about a government currency intervention, and so market players felt reassured in aggressively buying dollars and selling yen.
Yet that very same afternoon, the exchange rate flipped toward a stronger yen, and suddenly the yen was climbing back to hit around 1 USD/155 JPY. Within an hour the yen had appreciated by around 4 yen, which is something that’s unlikely to happen with ordinary trading. While the government didn’t come out and say it, there were strong suspicions that it had made a currency intervention.
Moreover, early on May 2 (Japan time), the yen again soared briefly up from 1 USD/157 JPY to the low 153-yen range. In less than one hour the dollar/yen rate had appreciated by around four yen, and much like on April 29, another currency intervention by the government was strongly suspected to have been made. The government has declined to clarify whether such an intervention took place, but this was also the case with what happened on April 29, and it would seem very likely that a so-called “masked intervention” was carried out in these instances.
A masked intervention, which is when the government makes a currency intervention but does not reveal that fact, is a method that was employed in 2022 as well, and it’s one that effectively makes it possible to tightly constrain the depreciation of the yen by fueling market suspicions.
On May 1 (U.S. time), a meeting of the Federal Open Market Committee (FOMC) was held. As expected, the federal funds rate was maintained, but at the press conference that followed, Chairman Jerome Powell of the Federal Reserve Board (FRB) remarked that “I don’t think it’s likely…that the next move we make would be a rate hike.” This drew the market’s attention, and subsequently the value of the yen began to climb back up.
If the yen had started to weaken once again after the FOMC meeting, the Japanese government presumably would have been prepared to embark on a dollar-selling/yen-buying intervention in the U.S. market. Yet given that the yen in fact began to appreciate instead, it’s possible that the government saw this and then shifted its strategy. In other words, the government may have seized this moment when the market trend began moving toward a stronger yen and decided to implement a “yen-boosting intervention”.
The reason is that when the yen is on a strong downward track in the markets, even if the government makes a dollar-selling/yen-buying intervention, its effects would be short-term and could end up getting absorbed by the market, whereas if it makes a yen-boosting intervention at a moment when the yen is on the rise, it’s relatively easier to encourage the yen to appreciate, and this does happen frequently.

Currency interventions are a policy for buying time

The dollar/yen exchange rate going forward will likely continue to be influenced to a large degree by U.S. economic indicators. It’s also possible that if a series of weak economic indicators are announced in the U.S., the 1 USD/160 JPY exchange rate seen on April 29 will stand as this year’s peak, leading the depreciation of the yen to reverse back to around 145 yen to the dollar by the end of the year.
Conversely, if strong economic indicators keep coming out of the U.S., then the yen might slide down even further beyond the 1 USD/160 JPY level. In that case, the government could be expected to carry out another currency intervention. This could perhaps lead to friction with the U.S. government, given the latter’s aversion to such interventions, but with Japanese companies and households growing more discontent with each passing day as the ongoing depreciation of the yen keeps driving prices higher, the government might well make another currency intervention, with the additional aim of appealing to the public that it has taken measures to combat the weak yen.
In fact, the yen’s downward slide is squeezing households. The yen has weakened by around 14% from 1 USD/140 JPY at the beginning of the year to the 160-yen level, but that decline will have driven consumer prices upward by around 0.2% in one year (according to the Cabinet Office’s “ESRI Short-Run Macroeconometric Model of the Japanese Economy (2022 Version)”).
This rise in prices translates to an average annual burden of 6,590 yen for households. The depreciation of the yen raises consumers’ fears about higher prices not just in the short-term but into the future as well, and in so doing could prove a strong headwind for consumer spending.
However, it would seem to be difficult to change the yen’s downward trajectory with currency interventions alone. According to the Bank of Japan’s “Central Bank Survey of Foreign Exchange and Derivatives Activity (in April 2022: Turnover Data)”, the average daily turnover in Japan’s Forex market came out to $432.5 billion. This works out to 67.0 trillion yen at the rate of 1 USD/155 JPY.
The government made three dollar-selling/yen-buying interventions in 2022, but their total value was 9.2 trillion yen. The most recent two currency interventions were also presumably around 9 trillion yen in scale. These numbers are quite small compared to the daily Forex turnover in Japan, and thus it would seem difficult for a mere currency intervention to have a substantial impact on market supply and demand trends.

The real focus should be on the strengthening of cooperation between the government and the Bank of Japan

That said, could a currency intervention temporarily halt the yen’s downward trend, and actually buy time? Currency interventions are also referred to as a policy for buying time. Further, if this currency intervention were combined with an approach to strengthen the collaboration between the government and the Bank of Japan to prevent the yen from weakening, then the effects of that depreciation prevention could be expected to increase.
It is the government that’s responsible for currency policies, and the Bank of Japan doesn’t use exchange rates as an indicator for conducting its monetary policy, but could an anti-depreciation effect arise if the Bank were merely to show concern over the weakening yen (which could potentially undermine economic stability), and to simply make an outward appeal demonstrating its stance to deepen cooperation with the government to achieve currency stabilization?
At present, I believe that the Bank of Japan will make an additional rate hike this September at the earliest. On the other hand, the market expectation is for the FRB to cut interest rates in September. If speculation continues to grow that the U.S. and Japan will move in opposite directions with their monetary policy revisions, then we could expect the strong dollar/weak yen trend to abate or even reverse in the exchange markets.
The growth of such speculation can be expected to ease depreciation pressures this summertime, but in the interim, the real question will be to what extent such currency interventions and a collaborative approach between the government and the Bank of Japan can stop the yen from depreciating.
At the moment, I’d like to think that if the Bank of Japan can forge a strong partnership with the government, then even in the worst-case scenario of 1 USD/165 JPY, it might manage to halt the yen’s slide against the rising dollar.