The yen has weakened in the first four months of the year after the dollar began to strengthen at the start of the year. Last week, the dollar briefly broke through the 160 barrier against the yen and reached a high of 160.30, a fresh 34-year high. But since then, the pair has fallen back significantly, with some market participants suspecting that the Japanese authorities may have intervened twice.

In the first three trading days of this week, the yen resumed a downtrend for three consecutive days, and rebounded to near the 155.50 level in late New York trading yesterday. Some traders believe that the yen is likely to return to 160 due to the wide spread between US and Japanese monetary policy.

In this regard, senior investment strategist Luo Che told the media that the Japanese side is not aiming for a particularly strong yen, “I think they are aiming for a relatively stable yen, and of course, they don’t want the yen to fall through the floor again.”

According to market estimates, the Japanese government intervened in the exchange rate by a total of 8 trillion yen between April 29 and May 2. According to Rocher, Japan acted “not to create inflation and to prevent undermining the authority of the Bank of Japan governor.”

Yesterday, Governor Kazuo Ueda admitted at a press conference, “The depreciation of the yen has a side that can easily affect prices.” “The exchange rate is an important factor affecting the economy and prices, and there is a possibility that monetary policy needs to respond,” he said.

In contrast, Mr. Ueda stressed last month that “we will definitely not directly change monetary policy in response to exchange rate movements.” Some analysts pointed out that Ueda Kazuo is after a meeting with Japanese Prime Minister Fumio Kishida, the tone has changed significantly.

Minutes of the BOJ meeting released earlier in the day showed a clear “hawkish” shift in the stance of members at the meeting, with several members calling for the need to steadily raise interest rates to guard against the risk of an inflation overshoot. ‘The yen’s depreciation, combined with rising prices, has started to push up import prices and thus producer prices,’ the minutes wrote.

Mr. Roche said that aside from monetary tightening in Japan, nothing else has really strengthened the yen. He also added that monetary policy would raise rates by at least 50 basis points and that there would be “unsterilised intervention” in the yen’s exchange rate.

“In other words, the Japanese authorities need to shrink the domestic money supply. As far as I can see from the statistics, the central bank hasn’t done anything like that.”

The Japanese authorities’ entrance into the “rescue” has been costly.

According to data released by the Japanese Ministry of Finance, from April 26 to May 29, the total amount of foreign exchange intervention operations by the Japanese authorities was about 9.8 trillion yen, setting a new monthly record. This amount also exceeds the total foreign exchange intervention operation of about 9.2 trillion yen in the whole of 2022.

The large-scale foreign exchange intervention operation highlights the attitude of the Japanese authorities to “defend the yen”. How effective is unprecedented foreign exchange intervention? From the trend of the yen exchange rate, foreign exchange intervention in the short term to stop the fall of the yen, but ultimately little effect.

The market is widely speculated that the Japanese authorities’ first entry into the “rescue” point occurred on April 29. On the same day, the yen fell below the 160 mark against the dollar, then quickly rebounded and rose to near 154.53. In subsequent sessions, the yen briefly strengthened to 151.85 against the dollar. But the yen’s decline did not stop there, and by Friday’s close, the yen had fallen below the 157 mark against the dollar, once again falling back to its lowest level since 1990.

Market analysts believe that the foreign exchange intervention of the Japanese authorities has slowed down the decline of the yen to some extent, but the foreign exchange intervention “treats the symptoms rather than the root cause” and cannot fundamentally reverse the depreciation trend of the yen.

“Foreign exchange intervention works in the short term, but not against the trend.” Zhang Meng, senior researcher at Industrial Research, said that the Japanese authorities intervened near the 160 level, strengthening the resistance to this level, and from this point of view, the foreign exchange intervention is effective. Looking ahead, there is limited room for the yen to depreciate, but the yen’s trend appreciation still requires a sharp fall in the US dollar exchange rate or a large-scale flight to safety driven by global funds.

Hu Jie, a professor of practice at Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University, said that the fundamental factor driving the depreciation of the yen is still the interest rate difference between Japan and the United States, and the pressure on the depreciation of the yen will still exist when the interest rate maintains a large gap. Only when dollar interest rates start to fall or yen interest rates start to rise can this depreciation be fundamentally reversed. Hu Jie believes that in the future, the Japanese authorities may still intervene in foreign exchange to curb excessive speculative market behavior and control the speed of the depreciation of the yen.

With the rapid depreciation of the yen, its stimulative effect on the Japanese economy gradually fades.

Citic Securities research report said that the depreciation of the yen is not always good for the Japanese economy: the number of Japanese exports has not increased significantly due to the depreciation of the yen, and the rapid depreciation of the yen is not conducive to the repair of residents’ real income and purchasing power, and may reduce the international appeal of yen assets in the short term.

Against this backdrop, the weakness of the yen has become a major problem for the Bank of Japan. The Bank of Japan is facing a dilemma: on the one hand, the yen needs to be lifted by the BOJ; On the other hand, weak domestic consumption in Japan is also difficult to support a rapid rate hike.

For the follow-up monetary policy path of the Bank of Japan, Zhang Meng believes that the current Japanese economy is still on the brink of recession, and the Bank of Japan may raise interest rates again only if it sees significant growth in potential inflation and household inflation expectations. As for the pace of rate hikes, it is not expected to be continuous.

On Friday, local time (May 31), the Japanese Ministry of Finance disclosed on its official website the implementation of the Foreign Exchange Balance Operation from April 26 to May 29, during which the amount of operation was “9 trillion 7885 billion yen”, which exceeded market expectations of 9.4 trillion yen, and renewed the monthly record of 9.1 trillion yen set in 2011.

According to media analysis, the record intervention spending shows that the Japanese government is serious about fighting back against speculators. On the other hand, the scale of action required to prop up the yen even temporarily is enormous, reflecting the rising difficulty of defending the currency.

Sumitomo Mitsui Banking Corp chief currency strategist Hirofumi Suzuki said: “Overall, the amount feels a bit large, but basically within expectations. It didn’t break through 10 trillion yen, so it didn’t feel too big and didn’t really have much of a reaction to the dollar versus the yen.”

With the interest rate gap between Japan and the US still wide, markets expect the yen to remain under pressure. While the Bank of Japan has joined the global tightening of monetary policy, short-term interest rates in Japan are still just 0.1%, compared with the 5.25% to 5.50% range of the federal funds rate.

Unless there are clear signs that US interest rates are starting to fall, or the Bank of Japan pushes more aggressively to raise borrowing costs or cut back on bond purchases, there is little chance of the trend turning between the dollar and the yen. But there is also a view that Japan’s monetary officials are simply trying to buy time, rather than reverse the dynamic.

“You can’t tell what amount of money will have a big impact because the market is like a living creature,” said Hideo Kumano, chief economist at Dai-ichi Life Research Institute and a former Bank of Japan official.

“But without these interventions, the yen would have depreciated further, so a move closer to 10 trillion yen is effective.” Data at the end of April showed that Japan had $1.14 trillion in foreign exchange reserves, suggesting that the authorities still have plenty of firepower to take on yen bears.