Japan has intervened in currency markets for the first time since 1998 to support the yen, seeking to stem a 20% plunge against the dollar this year amid a widening policy divergence with the United States.
The yen rose as much as 2.3% against the dollar, pulling back sharply from the lows of the day when it had breached a key psychological level of 145, as top currency official Masato Kanda said the government was taking “bold action”.
The intervention, coming after the Bank of Japan insisted it would stick with its negative-rate policy even as the Federal Reserve continues to hike aggressively, indicates how a pain threshold had been reached as hedge funds kept adding to short bets on the yen. The question now is whether the unilateral action will work.
“At best, their action can help to slow the pace of yen depreciation,” said Christopher Wong, a currency strategist at Oversea-Chinese Banking Corp. “The move alone is not likely to alter the underlying trend unless the dollar, US Treasury yields turn lower or the BoJ tweaks its monetary policy.”
Currency intervention is an extraordinary move for a country that has long been criticised by trading partners for tolerating or even encouraging a weak currency to benefit its exporters.
The last time Japan strengthened the yen with direct intervention was during the Asian financial crisis in 1998, when the exchange rate reached around 146 and threatened a fragile economy.
It had also previously intervened at levels around 130 to weaken the currency in 2011.
The yen rose 1.7% to 141.71 against the dollar in late-afternoon trade in Tokyo. Kanda had called the moves against the currency sudden and one-sided as he announced the intervention.
Japanese authorities have been stepping up verbal warnings in recent weeks, and the Bank of Japan conducted a so-called rate check in the foreign-exchange market as a last move to warn of speculative bets.
On Thursday, BoJ governor Haruhiko Kuroda and his fellow board members kept the central bank’s yield curve control programme and its asset purchases unchanged as had been widely expected.
The central bank chief later said in a briefing that there may be no need to change forward guidance for two or three years, and there is no prospect for a near-term rate increase.
The yen is the worst performer among Group-of-10 currencies. Japanese companies and households have become increasingly vocal about the negative effects of the weaker currency, as input and energy costs soar. A further slide will put pressure on the consensus between a central bank determined to stoke inflation and a government desperate to avoid a cost-of-living crisis.
In related developments, the Indonesian rupiah pared most of its earlier losses on Thursday after the central bank delivered a larger-than-expected interest rate hike, while other Asian currencies retreated after the Fed gave a hawkish monetary policy outlook.
Equities in Asia also hit a two-year low after the Fed delivered its third straight 75-basis-point rate hike on Wednesday and signalled further increases, underscoring its resolve to not let up its fight to contain inflation.
Bank Indonesia (BI) raised its key interest rate by 50bps, higher than the expectations of 25bps hike, after unexpectedly hiking its policy rate in August for the first time since 2018, embarking on monetary tightening to fight rising inflation.
“This second surprise in a row from BI was mainly on account of a rather hawkish pivot by Fed yesterday, and more rate hikes are expected by BI over the next few meetings,” Societe Generale economist Kunal Kundu said.
The rupiah was down 0.2%, after touching a more than two-year low, while shares in Jakarta were largely unchanged.
The Philippine central bank also raised its benchmark interest rates by half a percentage point, as expected, in its fifth hike this year to curb inflation and support a sagging local currency. The peso remained largely unchanged at a record low, down 0.9%, while equities in Manila were down 0.6%.
Fed officials have signalled that borrowing costs would keep rising this year and projected rates hitting 4.4% this year, higher than markets had priced in before the Fed meeting and 100bps more than the central bank projected three months ago.
Taiwan’s central bank also raised its policy rate on Thursday for the third time this year, reflecting continued concerns about inflation, even as it cut the economic growth forecast for 2022 on slowing export momentum.
The central bank raised the benchmark discount rate by 12.5bps to 1.625%, as expected.
“Our economy shows a downward trend, but there are still many uncertainties ahead,” governor Yang Chin-long told reporters, citing factors including the war in Ukraine and geopolitical tensions in the region.
Vietnam’s central bank, meanwhile, said it would raise its policy rates by 100bps, as the country fights to keep inflation under 4%.
Effective Friday, the refinancing rate will be raised to 5.0% and the discount rate to 3.5%, the State Bank of Vietnam (SBV) said, in rare monetary policy tightening.
The dong has fallen in recent days to 23,700 per dollar, the lowest since at least 1993, according to Refinitiv Eikon data.
