Forex

Explainer-Yen has passed the key 150 threshold. What’s next? Stocksak

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© Stocksak. An employee of Gaitame.com, a foreign exchange trading company, stands in front of monitors that show the Japanese yen rate against the U.S. Dollar at its Tokyo, Japan dealing room, October 21, 2022. REUTERS/Kim Kyung-Hoon

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By Leika Kihara

TOKYO (Stocksak), – The yen fell below the psychological level of 150 against the dollar for the first times since 1990. This was despite repeated threats by Japanese policymakers to intervene to reduce excessive currency market volatility.

Here are some details about how Japanese policymakers might respond.

WHAT HAS JAPAN ACTUALLY DONE IN THE END OF JAPAN’S LAST YEAR OF YEN-BUYING INTEVENTION?

Japan spent approximately 2.8 trillion yen ($18.6 million) in dollar-selling and yen-buying intervention when authorities intervened in the markets to support the yen for first time since 1998.

Since then, policymakers repeatedly have threatened to take action against volatile yen movements. They also successfully lobbied to include in the G7 finance leaders’ last week statement that authorities will closely monitor “recent volatility” in markets.

However, the steps did not prevent the dollar’s 7% gain against the yen following the Sept. 22 intervention. Although the yen has made occasional suspicious blips since Sept. 22, authorities have not revealed whether they intervened.

WHAT TRIGGER COULD YOU USE FOR THE NEXT INTERVENTION?

When deciding whether to intervene, policymakers repeatedly stated that they consider the speed at which yen moves, and not its level.

These comments reflect Japan’s need to respect the tacit agreement of G7 advanced nations that intervention in the market would be justified only when it is aimed at smoothing “excessive volatility or disorderly moves”.

Tokyo will therefore not intervene in a way that seems to be defending a particular yen level. Future intervention will be more likely if the currency’s falls accelerate, as it did on Sept. 22, when it lost almost a full yen in a short time.

WHERE IS THE PAIN POINT, THE NEXT LIE IN THE SAND

The Prime Minister Fumio Kishida was criticized by lawmakers for failing slow the yen’s constant fall, which pushes up import prices and household living expenses.

Authorities deny having a line in sand in their minds, but such political factors do mean that they need to be mindful about defending psychologically significant thresholds. They also examine technical charts to determine key support levels for Japan’s currency, which could lead to its decline if it is broken.

Some market players point out the dollar/yen September 1990 high of 152.3 as the next threshold. After that, it would be 155. Others claim that there is no major barrier beyond 160. A break above 160 will bring the pair to levels unreachable since the 1985 Plaza Accord, when major countries, including Japan, coordinated their actions to reverse the dollar’s upward trend.

WHAT CAN THE BOJ DO?

The economic recovery is still fragile and the Bank of Japan has not shown any interest in changing its ultra-low interest rates or its dovish stance, which are responsible for driving down the yen.

However, the central bank is struggling with its yield curve control (YCC). Rising global rates are pushing the 10-year yield above its implicit 0.25% ceiling and putting upwards pressure on the entire yield curve.

The BOJ is forcing the 10-year yield at 0% with unlimited bond purchases to keep it there. It also gives the green light to speculators to dump yen, thereby contradicting government efforts in slowing currency’s sharp declines.

The central bank could be under pressure to change its dovish communication regarding the future policy direction if there is public criticism of the BOJ’s policies. Analysts believe that this could lead to a revision to YCC as Haruhiko Kuroda (dovish governor) sees his term ending in April.

However, Kishida has defended the BOJ’s loose policy so far. Kuroda is facing calls from some opposition lawmakers to resign before the end his term.

($1 = 150.2400 yen)

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