How to spot Japan's secret yen buying

Japan's Ministry of Finance spent an estimated ¥9 trillion buying yen in two rounds of intervention, if the Bank of Japan's own current account projections are any guide. After the yen jumped sharply from 160 per dollar, officials declined to confirm whether they had been in the market at all.

How the yen reached 160

The slide had been building for months. The Bank of Japan ended its negative interest rate policy in March, lifting its short-term rate to a range of zero to 0.1 per cent, but it paired the move with signals that financial conditions would stay easy. At its meeting on 26 April it left policy unchanged, and Governor Kazuo Ueda's remarks were read as showing little concern about the weak currency. By the end of that day the yen had fallen through 158.

It broke 160 on 29 April, a public holiday in Tokyo when domestic trading was thin, for the first time since 1990. Within hours it had rebounded by several yen, a move too large and too abrupt to be explained by ordinary flows. A second sharp jump followed late on 1 May, shortly after the Federal Reserve's policy announcement in Washington, again at a time when liquidity in Asian trading hours was light.

Reading the BoJ's books

Analysts can work out the size of the operation by comparing the Bank of Japan's daily operational forecasts with the actual changes in private banks' current account balances. Silence leaves speculators who are short the yen guessing about when the next round will come. But foreign reserves spent this way buy only brief relief while the interest rate gap stays wide.

The method works because of how intervention settles. When the ministry sells dollars and buys yen, the trade settles two business days later, and the yen it receives drains money from commercial banks' accounts at the central bank. The Bank of Japan publishes its projection of those balances in advance, based on known government payments and receipts. Money-market brokers produce their own forecasts too. When the actual figure falls far short of every forecast, the gap is a close proxy for the yen the ministry has bought.

The Golden Week holidays complicated the timing, pushing some settlement into the following week, which is why estimates for the two rounds arrived separately. The ministry will publish its monthly intervention total at the end of May and daily details later in the quarter. Until then, the current-account arithmetic is the best evidence available, and it points to one of the largest episodes on record.

What the 2022 episode teaches

Japan last bought yen in September and October 2022, spending about ¥9.2 trillion over three days as the currency fell towards 152 per dollar. The intervention slowed the decline but did not end it. What turned the yen that time was a change in American rates: a softer-than-expected US inflation report in November 2022 convinced markets that the Fed was nearing the end of its hikes, and the yen strengthened substantially over the following months.

The joint intervention of June 1998, when Washington and Tokyo bought yen together, had a similar lesson. Coordinated action carries more weight than a lone central bank, but it lasted only as long as fundamentals cooperated. This time there is no sign of American help, and the Treasury has signalled that it expects intervention to be rare and communicated in advance to partners.

The carry trade and its victims

The underlying pressure comes from the rate gap. The Fed's benchmark sits at 5.25 to 5.50 per cent, while Japan's overnight rate is barely above zero and ten-year Japanese government bond yields remain below one per cent. That spread pays investors to borrow yen and buy dollar assets, and it keeps Japanese households, life insurers and pension funds sending money abroad. Intervention can punish short positions for a few days, but it cannot change what the positions earn.

The weak yen divides Japan's economy. Exporters such as carmakers and machinery firms book fat profits when overseas earnings are converted back into yen, and inbound tourism is booming. Households pay more for imported food and energy, which erodes the real wage gains the government has been trying to engineer through this year's large spring pay settlements. Politically, the second group is louder.

The case for patience in Tokyo

The ministry is not short of ammunition. Japan holds more than $1 trillion in foreign reserves, most of it in dollar securities, so a few rounds of this size can be repeated many times before reserves become a constraint. Officials also argue that they target volatility rather than a particular level, and on that narrower test the operation succeeded: it punished one-way bets and forced speculators to price in the risk of sudden losses.

The weakness of that defence is that markets test resolve by returning to the same level. Selling Treasuries to fund intervention also adds marginally to supply in the American bond market at an awkward time, which Washington tends to notice. And each round spent without a change in rate policy teaches traders that the ministry is buying time rather than changing the trend.

What would turn the yen

The signals to watch are mostly outside Tokyo. A run of softer American inflation data that revives expectations of Fed cuts would narrow the gap from the dollar side. At home, the Bank of Japan's next meetings, including any decision to slow its purchases of government bonds or to raise rates again, would matter more than any amount of intervention. Comments from Masato Kanda, the vice-minister for international affairs, will signal how close the ministry is to acting again.

Tokyo timed its intervention well and may have bought a few weeks. It will probably have to spend again unless the Bank of Japan becomes more willing to raise rates, and so far it has shown little sign of that. If the yen drifts back towards 160 before the summer, a third round is the likeliest response.