US Japan Yen Intervention Analysis Essay
The intervention by the US and Japan in an attempt to rescue a weak yen is seen as historic, happening for the first time in decades. The US Japan yen intervention happened as a measure to relieve significant downward pressures on the Japanese currency.
What Happened?
On Monday, August 3, Japan’s finance ministry reported that they have initiated a coordinated intervention with the United States Treasury to buy up the yen on July 31, due to “excessive volatility” and “disorderly” currency movements over the last several weeks. The yen dropped to as low as 163.73 per dollar last Thursday – the lowest it has been in 40 years – and has since then recovered some ground to about 157.57 yen per dollar.
According to figures provided by the Bank of Japan to Reuters, Japan could have sold off as much as $58.97 billion to buy yen in New York markets in the lead-up to the coordinated move, with other estimates putting Japan’s single-tranche purchase around $53 billion. Remarkably, reports suggest that the U.S. Treasury sold euros rather than dollars to fund the intervention – an unorthodox twist for a currency intervention, prompting criticism from commentators attempting to understand the motivations of the Trump administration.
Why the Yen Collapsed in the First Place
The weakness of the yen has been a major headache for years, with a combination of factors contributing to the devaluation. These include the widening interest rate differential between Japan and the U.S., coupled with fears that Prime Minister Sanae Takaichi’s expansionary fiscal policy – which involves boosting defense spending – would lead to higher deficits. Further weighing on the yen were rising oil prices, partly linked to tensions in the Middle East. Last but not least, the Bank of Japan’s decision to raise rates by 1 percentage point to 1 percent – the highest level in 31 years – failed to stem the slide, and a separate intervening effort by the Japanese authorities in the spring failed to have a lasting effect. All these factors combined to put further pressure on the currency, and increase inflationary pressures on imported goods, becoming a major political issue in Japan, hurting Prime Minister Takaichi’s popularity.
Why the US Got Involved
President Trump weighed in on the situation when he spoke to reporters on his way back from his latest campaign rally on Air Force One. He explained that the decision to intervene represented good faith efforts by both countries, noting that Japan “asked us to help them out,” given their alliance, and he felt the intervention was good for America. Analysts speculate that a major reason for the involvement by the U.S. was that weakness in the yen and Japanese debt markets would have negative repercussions on the U.S. markets, including increased pressure on interest rates on American government bonds, which the Trump administration is seeking to decrease. It is noted that a direct intervention by the U.S. makes it less likely that Japan will be forced to sell large amounts of American Treasuries to stabilize their currency, which would also have negative repercussions on U.S. interest rates.
How Rare Is This, Really
It is rather rare for both countries to coordinate such an endeavor, with the most recent comparable situation being in 2011 – after the Tohoku earthquake and tsunami – when the yen was excessively strong, and therefore both nations intervened to weaken it. However, this is the first time that both nations have intervened to buy up yen in order to strengthen it. Analysts note that the last time when a similar coordinated effort took place was in 1998.
Japan’s finance ministry makes it clear that this is not a one-off measure, as they have coordinated yet another intervention with the United States. Moreover, they expect to utilize the foreign repo facility of the Federal Reserve in the future as well, which allows banks that have been approved to do so by the central bank to sell American government bonds in order to temporarily acquire dollars.
Will It Actually Work
Currency experts are generally skeptical about the prospects of such an intervention. One expert from Japan’s NLI Research Institute noted that although a joint statement by the two nations would have a bigger impact than just Japan acting alone, it is unlikely that the trends affecting the yen will simply dissipate due to such measures. Experts note that the Japanese authorities have tried to prop up the value of the yen for several months now, with as much as $150 billion being poured into the market in the last year alone, with little to no success.
There are several other factors that may also have an impact – for example, the implied volatility of the currency is a crucial variable. The intervention has caused increases in volatility in currency pairs that have yen as one of the currencies. This hurts carry trade positions that are based on the low-interest rates, which can lead to unwinding of carry trades if there is a rapid rise in the value of the yen. Analysts warn that if a large-scale intervention occurs, it may overwhelm currency markets, triggering selling of several risk assets at the same time, including equities.
What to Watch Next
Given that the Japanese authorities have suggested that they may be open to more interventions, and the U.S. has also become involved, it will be crucial to pay attention to market reactions to any more coordinated actions, as well as macroeconomic data releases and interest rate moves that may affect the value of the yen.
