The financial landscape of Japan has recently experienced tumultuous fluctuations, particularly regarding the value of the yen against the US dollar. A period defining this turbulence occurred at the end of April and beginning of May, which some have described as a "roller coaster" for the yen. The Bank of Japan, facing persistent downward pressures on the currency, has intervened heavily in the market, pouring an astonishing 9.8 trillion yen (approximately $62.3 billion) into stabilizing the yen's exchange rate. This intervention has not only surpassed market expectations of around 9.4 trillion yen but also set a new record for monthly intervention, eclipsing the 9.1 trillion yen that was seen during the crisis in 2011.

Daisaku Ueno, Chief FX Strategist at Mitsubishi UFJ Morgan Stanley Securities, remarked that the scale of the intervention was unexpected, indicating Japan's firm resolve to combat rising imported inflation. He suggested that further significant interventions might be on the horizon. As of the latest reports, the yen had dropped to an alarming exchange rate of 157.25 yen to the dollar, representing a level at which previous interventions had been implemented.

The fluctuations in the yen's value since late April have been unpredictable. The exchange rate had plummeted past 160 yen to the dollar, only to rebound dramatically on May 3 to 152.75 yen, marking a weekly surge of 3.5%, the highest increase seen in 17 months. Throughout this period of rapid recovery, government officials including Prime Minister Fumio Kishida and senior foreign exchange officials remained conspicuously silent, fueling speculation within financial circles. Analysts estimated that the central bank had stepped in on several occasions—specifically on April 29, May 2, and May 3—to fortify the yen. With the release of the Ministry of Finance's report on interventions from April 26 to May 29, the total interventions during this timeframe were confirmed at the 9.8 trillion yen figure.

Advertisement

What is significant to note, however, is that the report only provides an aggregated total over roughly one month, with specifics regarding daily interventions set to be disclosed quarterly, with expectations for the April to June breakdown to be available in early August.

Historically, Japan's last intervention efforts took place during September and October of 2022, when the Ministry of Finance expended around 9.2 trillion yen (around $606 billion) in attempts to stabilize the yen, which had fallen to an exchange rate of 151.95 yen per dollar at one point. This past intervention similarly had an almost immediate effect, with the yen recovering sharply during the last two months of 2022 from a low of 151 yen to about 127 yen. However, the yen's value soon resumed its descent as the Federal Reserve continued to raise interest rates while the Bank of Japan maintained its ultra-loose monetary policy.

Looking back to 2011, the Japanese government and the Bank of Japan were compelled to intervene in response to the significant rise in the yen following the Fukushima nuclear disaster due to capital inflows. During that time, they executed a record intervention totaling 9.1 trillion yen in just one month to counter the yen's upward surge.

Financial analysts from major institutions, such as Bank of America, have suggested that the scale and duration of intervention necessary for the Bank of Japan to safeguard the yen is likely to exceed the measures taken in 2022. This trend is driven by the ongoing pressures from carry trades and Japan's structural deficits, with the caveat that intervention costs would only be sustainable in the absence of Federal Reserve rate cuts. Any short-term interventions exceeding 10 trillion yen (about $65 billion) could inadvertently harm the yen, signaling rapid depletion of foreign exchange reserves.

Despite the magnitude of these interventions, many analysts are skeptical about their long-term efficacy, with some noting that the ongoing "defense" of the yen is becoming increasingly complicated. As of late April, Japan maintained approximately $1.14 trillion in foreign exchange reserves, which provides a broad buffer but raises questions about sustainability in the event of continued depreciation.

Chen Yan, head of the Japan Enterprises (China) Research Institute, expressed little surprise at the outcomes of these interventions. He indicated that while the interventions may provide temporary relief, given the limited scale of yen that the government can circulate into the vast foreign exchange market, their impact risks being mostly diluted over time. Furthermore, the depreciation of the yen has been a central tenet of the "Abenomics" strategy—an economic policy legacy from former Prime Minister Shinzo Abe—which continues to influence government strategy today, even as leadership has shifted under new Bank of Japan Governor Kazuo Ueda.

In addition, developments in Japan's broader economic policies appear to endorse a yen depreciation outlook. Notably, larger corporate enterprises, particularly those actively expanding overseas, have benefitted from a weaker yen. They gain significant advantages in exporting, as a weaker currency enhances the purchasing power of their products in foreign markets, thereby boosting profits and invigorating stock prices.

Hideo Kumano, chief economist at Dai-ichi Life Research Institute and former Bank of Japan official, believes that without the recent interventions, the yen would have nosedived even further. His view underscores the importance of these measures as a means of mitigating potential currency crises.

As stakeholders eagerly await future actions from both the Japanese government and the central bank, market trends continue to reflect uncertainty over the yen's trajectory. Daisaku Ueno has pointed out that the exchange rate of 160 could represent a significant threshold for market sentiment. Yoshimasa Maruyama, Chief Market Economist at SMBC Nikko Securities, opined that Japan's interventions are likely to persist without opposition from other countries, indicating a continued commitment to prevent excessive depreciation of the yen.

Regarding potential interest rate hikes, economists largely agree that the Bank of Japan will not act hastily. According to Shigeto Nagai, Chief Japan Economist at Oxford Economics, the yen's weakness is unlikely to prompt immediate rate increases. Instead, he emphasizes that the market must anticipate a series of rate hikes aimed at combating rising inflation before expecting any substantial variations in the yen's value. Moreover, he notes that multiple rate hikes may not be in the offing, as the long-term high yields from the Federal Reserve could prolong the yen's decline and exacerbate import-driven inflation within Japan.

There are also observations from Japanese analysts highlighting the first quarter of this year as a period of unexpectedly steep economic decline, making it difficult for Japan to pursue tightening monetary policies or fiscal measures in the short term due to insufficient overall demand.