Japan steps up yen ‘psychological warfare’ with appeals to traders

A further slump in the Japanese yen halted on Wednesday after authorities stepped up warnings of a decline in the currency and called on traders to ask about market conditions.

The yen has plunged through a series of multi-decade lows against the dollar’s rise in recent months, but a surprisingly strong set of US inflation data on Tuesday sent Japan’s currency down another 2% on the day. overnight, pushing the exchange rate as high as ¥144.95.

In response, Bank of Japan officials phoned traders to inquire about market conditions — a so-called “rate check” that represents a high level of alarm, bringing the rate down to ¥143. In the past, these controls preceded instructions from the Ministry of Finance to intervene directly in the market to control the exchange rate.

Shunichi Suzuki, Japan’s top currency official and former finance minister, said he was “very concerned” about the seemingly speculative moves in the yen, Japanese media reported, adding that authorities would not rule out any options in their response. including direct intervention.

Traders have always warned that without direct action from the Treasury, a more aggressive test of the yen’s recent lows is still likely.

“Psychological warfare [between Japanese authorities and market participants] should continue for some time,” said Masamichi Adachi, chief economist at UBS. “There is an opinion that Japan is buying time” until the US central bank backs off from its interest rate hikes, he added.

The BoJ declined to comment, while the finance ministry did not immediately respond to a request for comment.

Unlike the United States, where the Federal Reserve has raised interest rates aggressively this year in an effort to bring down inflation, the Bank of Japan is resolute in its ultra-loose monetary policy. This spread crushed the yen against a range of other major currencies.

Some currency weakness is helpful in Japan, as it helps the country’s exporters. But it also drives up the cost of commodity imports, and the speed of the decline is troubling for businesses and investors. The yen has fallen by a fifth against the dollar this year.

The last time Japan stepped in was in concert with other major economies in 2011, when the yen soared after the Tohoku earthquake and tsunami. But it has been more than two decades since the authorities intervened to strengthen the currency following the Asian financial crisis and the collapse of the Japanese banking system.

Next week, the Fed, Bank of England and Swiss National Bank are all expected to raise rates. Investors believe the Fed hike could reach a full percentage point. This will keep the pressure on the yen.

“The Ministry of Finance is very concerned about next week which could be when the real intervention takes place,” said one market participant. “Today’s rate check at this point is a form of verbal intervention,” he added.

It is uncertain whether even an official round of dollar selling by the BoJ would force the yen to reverse course; interventions tend to be more successful when they are the result of the joint efforts of a series of heavyweight monetary authorities around the world rather than unilateral measures. For now, the Fed and ECB are highly unlikely to reverse their interest rate hike plans as they tackle a historic spike in inflation.

CLSA Japan strategist Nicholas Smith was among several prominent analysts who believe direct, one-sided intervention will not help.

“I had assumed that the Japanese authorities wouldn’t be stupid enough to let the world know that their cannon was loaded with cotton, but that’s politics,” Smith said.

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