Japan Intervened Twice in Third Quarter to Prop Up Yen

The Japanese government intervened in the foreign exchange market twice during the third quarter, spending a combined ¥5.54 trillion ($36.4 billion) to support the yen, reports Bloomberg. The interventions, carried out on July 11 and 12, were aimed at stemming the yen's slide against the dollar, which had reached a 38-year low of 160 per dollar, driven in part by speculative bets on the wide interest rate gap between Japan and the US.

The Ministry of Finance's intervention data for the quarter ended September, released on Friday, confirmed that no further smoothing operations were conducted beyond those two dates. Earlier analysis by Bloomberg suggested that the government likely sold US Treasuries to finance a significant portion of the interventions.

Japanese authorities have remained out of the market since July, as the yen gained some ground against the dollar amid narrowing interest rate differentials between Japan and other nations. The Bank of Japan hiked its benchmark rate to 0.25% on July 31, while the Federal Reserve and other major central banks have shifted towards cutting rates to support their economies.

However, following Donald Trump's re-election victory in the US presidential election, the dollar has surged against a range of currencies globally, placing the yen at risk of further weakening. As of Friday, the yen was trading around 153 to the dollar, nearing its weakest level since July.

Wall Street anticipates that Trump's presidency could lead to policies that strengthen the dollar, such as tariffs on US trade partners and domestic tax cuts, potentially driving inflation and higher interest rates. However, uncertainty remains regarding the specific policies and their impact on currency trends.

Some economists believe that under a Trump administration, Japan may find it easier to garner US support for currency interventions, given the president-elect's past pronouncements in favor of a weaker dollar.

"Trump’s stance might be ‘well done on intervening’ if Japan stops yen weakness," said Atsushi Takeuchi, Chief Research Fellow at Ricoh Institute of Sustainability and Business, to Bloomberg. "From his perspective, the US doesn’t have to spend anything — the Japanese are doing it for him."

Others argue that Japan may face greater challenges. The US could impose conditions on Japan before agreeing to dollar-selling operations, potentially exacerbating inflation in the US, according to Tohru Sasaki, chief strategist at Fukuoka Financial Group Inc.

"Trump might say, if you want to intervene, buy some fighter jets," said Sasaki to Bloomberg. "The Japanese government is likely to remain weak for some time so it might not be able to respond to that sort of condition. So there could be a higher hurdle for intervention."

Meanwhile, Japan's chief currency official, Atsushi Mimura, issued a stern warning on Thursday, stating that the government will monitor markets with "extreme urgency" and take action against excessive currency moves. These remarks followed the yen's weakening towards 155 against the dollar.

Economists surveyed by Bloomberg ahead of October's central bank meeting indicated that if the yen were to hit 160 against the dollar, it could trigger further government intervention.

In such a scenario, coordinating with key international partners, including the US, will likely be crucial. Major economies generally maintain that currency values should be determined by market forces, and US Treasury Secretary Janet Yellen has repeatedly emphasized that currency intervention should be a seldom-used tool, with officials giving fair warning in advance. While she has not criticized Japan's recent interventions, her comments highlight the general international stance against frequent or aggressive currency intervention.

At recent international conferences, Japan has consistently emphasized the Group of 20's stance that excessive and disorderly movements in exchange rates could destabilize global economic and financial stability. This likely serves as an attempt to justify both past and potential future actions in response to such risks.

Prior to the July interventions, the Japanese government has also carried out currency interventions on April 29 and May 1. Estimates place the size of these interventions at approximately ¥9.79 trillion ($62.23 billion).