How was the intervention in the Japanese Yen historically carried out?

In recent weeks, the Japanese yen exchange rate has plummeted, with the US dollar against the Japanese yen quickly breaking through the psychological barriers of 152 and 155, which are considered by the Japanese Ministry of Finance as possible intervention points. During Monday's trading session, it even briefly fell below 160, hitting the lowest record since April 1990.

Facing the precarious situation of the Japanese yen, how will the Japanese authorities act? HSBC foreign exchange analysts like Joey Chew in their latest report traced the history of the Japanese government's intervention in the foreign exchange market and pointed out that although the Japanese government has sufficient foreign exchange reserves to support its independent action to support the yen exchange rate, the cost of intervening in the foreign exchange market is also high without the support of a Fed rate cut.

If the Fed does not cut rates, intervention policy is difficult to sustain alone

Firstly, HSBC points out that based on past experience, the impact of Japan's unilateral intervention on the foreign exchange market is far less than the impact of joint actions between Japan and the US:

Coordinated intervention is often more effective than unilateral intervention. For example, the total amount of US dollars sold by Japan and the United States on June 17, 1998, was only $2.5 billion, but the impact on the US dollar against the Japanese yen (the difference between the intraday high and low was 6%) was greater than the first two times Japan acted alone:

On April 10, 1998, Japan sold $20 billion, with a difference between the intraday high and low of 3.3%; compared to December 19, 1997, when Japan sold $5.4 billion, the difference between the intraday high and low was only 1.4%.

HSBC also believes that a Fed rate cut is a necessary condition and "amplifier" for Japanese government intervention:

During the intervention period of 1989-1990, the Fed had been cutting rates, and about three months after the joint intervention on June 17, 1998, the Fed also cut rates.

In contrast, during the intervention period from September to October 2022, the Fed was still in a rate hike cycle. Although its last rate hike was in July 2023, as of April 2024, the US has not cut rates. Therefore, the USD/JPY is now about 9% higher than the average level from September to October 2022.

The analysts emphasize that if the Japanese government is determined to intervene in the foreign exchange market alone at a time when the Fed maintains high interest rates, considering the impact of the increased trading volume of the yen in recent years, a larger scale of intervention is now needed to dominate the spot yen market. The analysts estimate that the Japanese Ministry of Finance may need to use up to hundreds of billions of US dollars in foreign exchange reserves to effectively intervene in the foreign exchange market:

In nominal value terms, Japan's intervention efforts have been increasing over the years (1989-1990: $27 billion; 1997-98: $31 billion; 2022: $63 billion), but based on the scale of USD/JPY spot trading volume, in order to dominate today's foreign exchange spot trading volume as in the 1980s and 1990s, the Japanese Ministry of Finance may need to spend a total of $120 billion (35% of the recent average daily trading volume of USD/JPY) However, if intervention is necessary, it is not a problem for the Japanese government. Japan has abundant foreign exchange reserves. As of March 2024, its foreign exchange reserves reached as high as $1.3 trillion, with around $160 billion in deposits and $1 trillion in securities. Currently, the total foreign exchange reserves can cover 20 months of imports, higher than the 7-10 months in the 1980s and 1990s.

Analysts also believe that Japan's weakness is a result of ultra-loose monetary policy, and with Ueda and Oto already starting to push the Bank of Japan towards a shift, the long-term fundamental headwinds for the Japanese yen are also expected to improve.

History of Japanese Authorities Intervening in the Foreign Exchange Market

The last time Japanese authorities took intervention measures on the yen exchange rate was in October 2022, when the yen exchange rate fell to around 152 yen per US dollar. It is estimated that Japanese authorities spent as much as 9.2 trillion yen (or $607.8 billion) at that time to defend the yen exchange rate.

Here is a timeline of the Japanese authorities' interventions in the foreign exchange market:

1973: Japanese monetary authorities decided to let the yen float freely against the US dollar.

1985: The Group of Five (G5) countries (US, Japan, West Germany, France, and the UK) signed the Plaza Accord, agreeing to joint action to intervene in the foreign exchange market and weaken the US dollar index to address the massive US trade deficit.

February 1987: Six of the Group of Seven (G7) countries signed the Louvre Accord, aiming to stabilize the foreign exchange market and prevent a sharp decline in the US dollar.

January 4, 1988: The US dollar fell to 120.45 yen in the Tokyo trading market, hitting a post-World War II low. The Bank of Japan intervened by buying dollars and selling yen.

1991-1992: The Bank of Japan sold dollars to support the yen.

1993: The Bank of Japan sold yen for most of the year to suppress the yen's strength.

April 1994 - August 1995: The US dollar fell to a post-war low against the yen. The US intervened multiple times, usually in cooperation with the Bank of Japan and the ECB, to support the dollar.

1997-1998: The Asian financial crisis led to a weakening yen, reaching 148 yen per US dollar in August 1998. The Bank of Japan and the Federal Reserve jointly intervened by buying a large amount of yen.

January 1999 - April 2000: The Bank of Japan sold the yen at least 18 times, including once through the Federal Reserve and once through the ECB, out of concern that a strong currency would hinder economic recovery.

September 2001: After the 9/11 terrorist attacks in the US, the yen rapidly appreciated. The Bank of Japan, along with the Federal Reserve and the ECB, intervened in the foreign exchange market by selling the yen.

May to June 2002: With the support of the Federal Reserve and the ECB, the Bank of Japan intervened in the foreign exchange market again by selling the yen March 2004: After spending ¥35 trillion (over $300 billion) in Japan to intervene, a 15-month action to suppress the appreciation of the yen came to an end.

September 15, 2010: After the US dollar exchange rate hit a 15-year low of 82.87 yen, Japan intervened in the currency market for the first time in six years, selling yen to prevent currency appreciation.

March 18, 2011: Following the earthquake, the yen exchange rate soared to a historic high, prompting the Group of Seven (G7) to jointly intervene to prevent the yen from strengthening.

August and October 2011: To prevent the one-way rise of the yen from harming Japan's export-led economic recovery, Japanese authorities significantly sold yen.

June 10, 2022: The Japanese government and central bank issued a joint statement expressing concern over the sharp decline in the yen against the US dollar after falling below 134 points (verbal intervention).

September 7, 2022: Chief Cabinet Secretary Matsuno Hirokazu expressed concern over the "rapid and one-sided" trend in the currency market after the yen fell below 143 points against the US dollar (verbal intervention).

October 21-24, 2022: The US dollar exchange rate plummeted more than 7 yen in a single day, with sources believing it was due to the Japanese government buying yen. Japanese Finance Minister Suzuki Toshikazu refused to confirm whether the government intervened in the foreign exchange market.

March 27, 2024: After the yen fell to a 34-year low against the US dollar, the Bank of Japan, the Ministry of Finance, and the Financial Services Agency of Japan held a meeting, indicating readiness to intervene (verbal intervention)