Image © Adobe Stock
The impact of Thursday's action by Japanese authorities won't be forgotten, and that's the big win.
Fed up with the steady grind lower in the value of their currency, Japan's authorities finally took decisive action on Thursday by hoovering up billions of dollars worth of yen.
In fact, estimates suggest Japan's Ministry of Finance sold between US$60-80BN equivalent. The yen surged across the board on Thursday and Friday's charts show those gains are sticking.
"The move was in line with G7 guidelines, which allow action when markets become excessively volatile, with US officials notified ahead of the intervention. Focus now turns to whether the US may join Japan in supporting the yen - a move that would send a much stronger signal to speculators," says a note from Saxo Bank.
Having hit 160, USD/JPY collapsed to 155.50 at one point on Friday and there's still no hint of a recovery in the offing ahead of the weekend.
Authorities at the Ministry of Finance will be pleased there's been no sign of aggressive dip buying, which would have signalled that traders were confident Japan lacked the resolve to deal with its currency's devaluation.
This market hesitancy confirms the market's actions were a success: speculators were bitten and they will think twice about taking on the MoF.
"Further verbal interventions will now carry more clout too," says Lloyds Bank in a daily market briefing.
"It can create more two-way risk in a currency and dampen short-term speculative trading behaviour. Near-term, we feel another bout of FX intervention is possible," says Peter Dragicevich, Currency Strategist for APAC at Corpay.
Vice Finance Minister for International Affairs, Atsushi Mimura, issued a "final warning" over yen weakness on Thursday, triggering a selloff in the currency as would be expected.
That move got the ball rolling, and currency officials jumped on the momentum by engaging their terminals and buying billions of dollars worth of yen, triggering a succession of stop-loss orders that gave the move further momentum.
Mimura today says speculative selling of the yen is still being seen, which will be interpreted by traders that authorities are ready to dip into the market at any time.
If Thursday's bark was followed by a bite, Friday's growl will be respected.
However, Derek Halpenny, Head of Research at MUFG Bank Ltd, says there is still a danger that this action does not have a lasting impact.
"An escalation in the conflict and/or a further rise in energy prices could see USD/JPY rebound quickly," he says, pointing to MoF yen-buying interventions in April/May 2024.
Back then, U.S. yields did not decline (which would have naturally weighed on the USD) and intervention was required again by July.
"There is a risk that this intervention could be like the Apr/May 2024 episode given global yields are currently moving higher," says Halpenny.
Ultimately, fundamentals continue to favour yen weakness and that will be a strong, and expensive, headwind for authorities to fight long-term.
Analysts at Lloyds Bank say "the reality is that BoJ policy is still too accommodative, at a time when most of the other major central banks are shifting towards a more neutral/hawkish policy stance."
For the yen to find lasting support, at least a couple of rate hikes at the Bank of Japan are required.
