Will Bank of Japan intervene falling yen?

The Nikkei website claimed on Wednesday, citing unnamed sources, that the Bank of Japan had carried out a rate check in apparent advance of a currency intervention as officials increased their cautions about sudden drops in the yen.

Apart from verbal assistance, Japan has a number of alternatives for limiting significant yen depreciation. One of them is to directly intervene in the currency market and acquire significant amounts of yen. Details on how a yen-buying intervention may function, as well as the chance of it occurring, are provided below:

When was the last time japan intervene the falling yen?

Given the economy's reliance on exports, Japan has traditionally concentrated on containing severe currency gains while ignoring yen dips.

Yen-buying intervention has been quite unusual. The last time Japan intervened to strengthen its currency was in 1998, when the Asian financial crisis caused a yen sell-off and a significant capital exodus from the area. Previously, Tokyo acted to counter yen declines in 1991-1992.

What would drive Tokyo to buy Yen again?

Currency intervention is expensive and risky, considering the difficulties of affecting its value in the massive global foreign currency market. That is one of the main reasons it is seen as a last-resort action, which Tokyo would sanction only if verbal intervention failed to prevent a free plunge in the yen. The rate at which the yen falls, rather than its level, would be critical in determining if and when the government should intervene. USDJPY was traded around 103.20 early January 2021 and today (14 September 2022) it is on 143.36.

Some policymakers say intervention would only become an option if Japan faces a threat from all over directions — selling of yen, domestic stocks and bonds — in what would be similar to sharp capital outflows experienced in some emerging economies.

How Would it Work in todays economy?

When Japan intervenes to stem yen rises, the Ministry of Finance issues short-term bills to raise yen which it can then sell in the market to weaken the Japanese currency’s value. If it were to conduct intervention to stop yen falls, authorities must tap Japan’s foreign reserves for dollars to sell in the market in exchange for yen. Japan foreign currency reserves has started to decline as well

In both cases, the finance minister will issue the final order to intervene. The Bank of Japan will act as an agent and execute the order in. 

What will be the Challenges?

Yen purchasing intervention is more harder than yen selling intervention.

Japan's foreign reserves exceed $1.33 trillion, the world's second biggest behind China's, and are most likely made mainly of dollars. While reserves are plentiful, they might swiftly deplete if large sums are necessary to influence rates each time Tokyo intervenes.

That implies it can only intervene for so long, unlike yen-selling intervention, in which Tokyo may continue issuing bills to increase yen.

If done against the dollar/yen, currency intervention would also require tacit approval from Japan's G7 partners, particularly the United States. That is difficult given Washington's previous opposition to currency intervention, save in severe circumstances of market turmoil.