BOJ Warns Of Imminent FX Intervention: Here’s How Far USDJPY Can Fall… Before Surging Even More

One of the biggest casualties of yesterday’s CPI shock was the Japanese yen which, after gradually rebounding after last week’s collapse which sent thecurrency to 24 year lows, plunged as the USDJPY spiked by nearly 300 pips in response to the soaring dollar and expectations of a 100bps rate hike by the Fed.

However, just as the yen appeared set to take out the critical 145 level, the USDJPY dropped shortly after midnight ET, when Japan’s Nikkei reported that the BOJ (which intervenes in the FX market on behalf of the MoF) conducted a FX “rate check” on Wednesday, asking market participants about rates at which it could intervene.

Bloomberg confirmed reporting that the BOJ conducted a rate check in the FX market after top currency official Masato Kanda delivered a verbal warning Wednesday morning: “BOJ called asking for an indicative price at which it could intervene” the Bloomberg source said. The rate check, which is sometimes a precursor for actual intervention, followed Kanda’s statement at 8:30am local time.

Unlike prior heavy if ineffective verbal intervention by the central bank, where various official had warned that they are keeping a close eye on the yen however failing to slow the yen’s collapse, the latest media leak was seen as a move meant to prepare for imminent currency intervention by inquiring about trends in the foreign exchange market.

The verbal intervention worked, and USDJPY was last seen trading around 142.60, a steep from just shy of 145, where it traded earlier this morning.

While rate checks can be a precursor to physical intervention, it’s unlikely such a move would lead to an imminent action as they are likely an extension of verbal intervention, said Akira Moroga, manager of currency products at Aozora Bank in Tokyo. Still the rate check does underscore the authorities’ resolve against the weak yen.

Additionally, Japan’s Jiji reported that the BOJ asked the market situation at 144.90, which implies that BOJ/MOF has 145 in mind as a red line. Credit Agricole FX strategist David Forrester, confirmed as much, writing that a break of 145 by USDJPY would “probably lead to intervention by the Japanese authorities.”

That said, as Goldman notes, whether they actually do an intervention there or not is a separate issue, as they:

need to get a consent from the US,
FX intervention traditionally has been swallowed by the market in a matter of seconds ending up with no impact, especially when fx move is borne out of US fundamentals.

Japan does have large FX reserve (FX currency reserve is $1,172Bn in Aug), but if one intervention doesn’t work, the moment they stop JPY would shoot to the moon. Furthermore as shown in the chart below, BoJ FX interventions have not only failed to halt a sliding yen but have in fact preceded even bigger drops.

Looking further back in time, to the mid-1990s when the BOJ was more aggressively involved in FX intervention (and before the BOJ’s QE), shows a similar pattern: interventions were successful only in the very beginning, and then failed to in driving sustained declines in the USDJPY.

Or, as Goldman puts it, “once they start, it’s difficult to stop.”  Of course, nobody wants to be stopped out during the first big move which is why the BOJ will wait until the very last minute before it fires it first and potentially last FX intervention bullet.

Meanwhile, a BOJ adjustment on the YCC would have a impact on the JPY. With the Fed Funds rate heading towards 4%, a 0.1% adjustment on YCC wouldn’t make any impact, and would be again swallowed by the next strong US economic data.

Furthermore, unlike FX intervention, BOJ’s YCC adjustment can only be done once probably. The Japanese domestic economic data still doesn’t warrant a change in YCC.
 
In any case, the strong warning signal sent by the MOF/BOJ today – whether the rate check at 144.90 was actually done or not – was itself a strong enough message to cool down the market by 1 yen. But put it in another way, US CPI strong print moves the yen by 2 yen, but intervention warning has only half the impact. As such today was a good experiment for the MOF & BOJ (to see just how powerless they are to contain the drop in the yen).

Assuming the BOJ does in fact proceed with an intervention, how far could the USDJPY drop? According to Bloomberg’s FX strategist Vassilis Karamanis, following news of the “rate check”, risk reversals rallied in favor of yen topside this morning across the curve and the Japanese currency is up by 0.6% in the spot market. He notes that whether unilateral intervention can be successful over the medium-term is up for discussion, but “should we see the BOJ buying the yen in size, the dollar could move toward the 137 handle after a round or two of interventions are through. That’s where the 55-DMA and a Double-Top projection coincide. Note that nine-day RSI is sending early bearish signals, and momentum trading could take over should soon. To the topside, 145 remains the key level.”

Seiichi Nozaki, general manager at securities investment department at Fukoku Mutual Life Insurance in Tokyo, said that while Japanese authorities may strengthen the tone of the language if the yen falls beyond 145, any upward yen move would soon be taken over by market players looking to take fresh positions.

“I would put the probability of actual intervention at around 30%,” said Adam Cole, chief currency strategist at RBC Europe in London. “Today’s events may put a temporary cap at 145, but don’t expect that to hold for long” with pair seen rallying to 150.

Looking ahead, if the surge in the yen leads to a burst in inflation, it is likely that the Kishida administration will address the high inflation via Fiscal measures rather (subsidies for gasoline, wheat, and other items, in particular). BOJ head Kuroda, who has been a proponent of a weak yen, has explicitly dismissed rate hikes as an option to counter the weak yen….we would have expected Governor Kuroda to make more cautious comments if he was significantly concerned.