Tokyo has intervened in the currency markets for the first time in over four months, while the Bank of Japan followed the action with additional monetary easing amid growing pressure to stop the yen strengthening against the dollar.
It was not clear how much yen had been sold but market participants are expecting further sales during Thursday. The Bank of Japan announced an additional Y10,000bn to its Y40,000bn asset-purchase programme, citing worries about uncertainties in overseas economies and financial markets.
Tokyo’s actions followed moves by the Swiss National Bank overnight, which cut rates and said it would increase the supply of francs to money markets to stem the rapid rise its currency was also experiencing.
Both the yen and Swiss franc tend to be beneficiaries when investors are in risk aversion mode.
Japan’s central bank cut short its policy board meeting scheduled to finish on Friday to make the announcement. However, the additional Y10,000bn was in line with market expectations. The yen had dropped as low as Y79.37 against the US dollar following the intervention from Y77.06 overnight in New York. It has remained around these levels since the BoJ announcement. The Nikkei 225 index reversed its early-morning declines and was recently trading 0.6 per cent higher at 9,692.
“There is a possibility that these developments in overseas economies and the ensuing fluctuations in the foreign exchange and financial markets may have adverse effects on business sentiment, and consequently on economic activity in Japan,” the central bank wrote in a statement.
The BoJ is also concerned about the impact on prices following this month’s planned change in the base year used to calculate the consumer price index. The central bank is expecting this revision to lead to a downward revision in the year-on-year CPI.
“Apparently it will still take some time to achieve price stability,” the BoJ said.
The increase in the asset-purchase programme limit was unanimously approved, as was maintaining the overnight call rate at between 0-0.1 per cent. The central bank will increase purchases of a variety of assets including government bonds and treasury discount bills, corporate bonds and ETFs.
Some analysts are sceptical whether the combination of Tokyo’s yen intervention and additional easing by the BoJ will have the desired effect of holding down the yen if the intervention is just a one-off event. The timing is difficult due to continuing concerns over the US economy amid expectations of further easing by the Federal Reserve. Important employment data due out of the US on Friday could also add downward pressure on the yen should it disappoint.
“Considering that Japanese authorities are well aware of this environment, today’s action suggests that the MoF intends take action repeatedly, reducing the near-term chance of dollar/yen falling below the all-time low of 76.25,” wrote Masafumi Yamamoto, a currency strategist at Barclays Capital in Tokyo, in a note to clients.
The maximum potential amount of yen selling intervention is about Y39,000bn, which is “sufficient for repeated large-sized daily interventions for a month”, he said, assuming around Y2,000bn of selling per trading day.
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