Bank of Japan Spends Billions Defending Yen, Sparking Rally

The Bank of Japan (BOJ) has taken decisive action this week to defend the yen, spending a staggering $59 billion in currency interventions. These efforts have helped the Japanese currency achieve its best weekly performance in over a year, with the yen rising to a session high of 152.75 per dollar in Asia hours and set to clock a weekly gain of 3.5%, its largest since December 2022.

Why this matters: The Bank of Japan's intervention in the currency market has significant implications for the global economy, as a weak yen can impact trade balances and inflation rates worldwide. The Bank of Japan's intervention in the currency market has significant implications for the global economy, as a weak yen can impact trade balances and inflation rates worldwide. Additionally, the effectiveness of such measures in the long run will be closely watched, as it may influence the strategies of other central banks facing similar currency challenges.

Tokyo is suspected to have intervened in the currency market twice this week, during periods of thin liquidity. The first intervention occurred on Monday, when Japan was out for a holiday, and the second attempt happened late on Wednesday after Wall Street had closed. Since the start of the week, when the yen first slid past the key 160 per dollar level, the currency has strengthened by nearly eight yen against the dollar.

The BOJ's intervention is seen as an attempt to prevent further weakening of the yen, which could have negative implications for the Japanese economy. Vasu Menon, managing director of investment strategy at OCBC, said, "Unless the Fed takes its foot off the brakes, Japanese policymakers may be facing an uphill task of trying to reverse yen weakness." He added, "What the MOF probably wants is to prevent markets from taking a one-way bet on the yen, establishing a downtrend and causing it to weaken sharply."

The dollar's weakness is attributed to the Federal Reserve's less hawkish than feared comments, signaling a potential rate cut in the future. The Federal Reserve held interest rates steady at the conclusion of its two-day monetary policy meeting, indicating it is still leaning towards eventual rate cuts. Traders are now looking to U.S. nonfarm payrolls data due later on Friday to guide the dollar's next moves.

The euro, sterling, and other currencies also gained against the dollar, with the greenback losing ground against most of its peers and headed for its worst week in nearly two months. The euro ticked up 0.05% to last trade at $1.0730 and was eyeing a weekly gain of 0.35%. Sterling steadied at $1.25365 and was similarly set to rise more than 0.3% for the week.

Data from the BOJ and private money brokers suggeststhat the central bank likely conducted a second round of significant yen-buying intervention this week. The BOJ projected a drop of 4.36 trillion yen (approximately $28 billion) in commercial banks' deposits at the central bank next Tuesday, attributed to fiscal factors. This projection was released on Thursday, with Friday and Monday being holidays in Japan.

Vishnu Varathan, chief economist for Asia ex-Japan at Mizuho Bank, emphasized the importance of the BOJ's intervention strategy, stating,"Calculated and opportunistic market action for maximum effect is preferred. And the Ministry of Finance is practiced in this. Additionally, the element of unknown and surprise are key advantages that the BOJ and MoF will want to retain.

The Bank of Japan's aggressive intervention in the currency market this week, spending nearly $59 billion to defend the yen, has resulted in the currency's best weekly performance in over a year. The yen rose to a session high of 152.75 per dollar and is set to clock a weekly gain of 3.5%, its largest since December 2022. While the short-term impact has been significant, questions remain about the sustainability and effectiveness of such measures in the long run, since the underlying factors contributing to the yen's weakness persist.

Key Takeaways

• BOJ spends $59 billion to defend yen, achieving its best weekly performance in over a year.
• Yen rises to 152.75 per dollar, set to clock a weekly gain of 3.5%, its largest since December 2022.
• BOJ's intervention aims to prevent further yen weakening, which could negatively impact Japan's economy.
• Federal Reserve's less hawkish comments contribute to dollar's weakness, supporting yen's gain.
• Effectiveness of BOJ's intervention strategy in the long run remains uncertain, with underlying factors persisting.