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Column: The limits of foreign exchange intervention have already begun to be exposed, and if prolonged, the effect will be reduced = Toru Sasaki | Reuters

[Tokyo 27th]- On the afternoon of September 22nd, the Ministry of Finance/Bank of Japan intervened to sell the dollar and buy the yen. It will be the first yen-buying intervention in 24 years since June 1998. The dollar/yen exchange rate fell by more than 5 yen from the high 145 yen to the low 140 yen level following the intervention, but recovered to the 144 yen level in less than a week.

There has never been a single intervention that stopped the movement of the market, whether it was a yen-buying intervention or a yen-selling intervention. This was the case during the yen-buying intervention that took place from December 1997 to June 1998. A column by Toru Sasaki. This photo was taken in June 2017. (Reuters/Thomas White)

There has never been a single intervention that stopped the movement of the market, whether it was a yen-buying intervention or a yen-selling intervention. This was the case during the yen-buying intervention that took place from December 1997 to June 1998.

During this period, the intervention took place on three consecutive days in December 1997, two consecutive days in April 1998, and only one day in June. In both cases, the dollar has strengthened and the yen has depreciated beyond the level at which the intervention began in about a month to a month and a half. In that sense, the weak influence of the yen-buying intervention has already become more conspicuous.

As I have pointed out several times in this column in the past, the irony is that once foreign exchange intervention begins, it will conversely attract speculators. The yen buying this time is also clearly an intervention in the opposite direction of the fundamentals, and the yen will sell back immediately even if it intervenes. In that case, the Ministry of Finance and the Bank of Japan will intervene again, or repeat rate checks, and the yen will appreciate in the short term, and will soon return to depreciation.

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By doing this, investors from all over the world, who had never been interested in the yen exchange rate until now, are flocking to see what happened. Then, when the yen rises due to interventions and rate checks, the action of selling the yen begins. The leading players in yen selling are Japanese importers, in other words, actual demand, so this trade is easy because there are strong allies behind it.

In the first place, Japan has a strong tendency to blame speculators for market volatility and try to control movements and turn a blind eye to the real problem.

This time as well, it is said that it is trying to counter speculative movements, but the yen’s depreciation so far has basically been largely due to the selling of the yen by actual demand in line with the fundamentals. business transactions will be encouraged.

What is important in anticipating the movement from here is how much amount of intervention is possible. The speculators (investors) who have gathered with an interest in the dollar/yen market during the intervention on the 22nd ask when the next intervention will be (I want to buy when the dollar/yen falls) and when the limit of dollar selling intervention will come. I am interested in whether or not I should buy more even if the dollar/yen rises.

Under such circumstances, the 3.0 trillion yen to 3.5 trillion yen intervention amount on the 22nd, which was derived from the forecast of the BOJ’s current account balance fluctuation factors, was somewhat surprising. If this is true, it will be the largest single-day yen-buying intervention ever. There is a clear possibility that a large amount of intervention was carried out with the feeling that a “one-shot game” would be fine in order to maximize the caution of the market.

The author believes that the total amount of yen-buying interventions that began on the 22nd will remain at around 10 trillion yen at most. If a large amount of foreign exchange reserves is withdrawn and the effect is limited after all, there is a risk that speculators will start attacking from there and lead to a currency crisis.

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In addition, there are 19 trillion yen in foreign currency deposits in the foreign exchange reserves, but if a large amount of intervention is carried out in order to secure liquidity, it will be necessary to sell US Treasuries and keep them in deposits. You might think that you don’t want to do it on a very large scale because of the relationship with the United States.

Furthermore, as can be seen from the movement of the British pound, the overall dollar-buying movement is intensifying. It will be extremely difficult to contain only the rise of the dollar/yen. From 1997 to 1998, yen-buying interventions totaled 4.1 trillion yen.

Considering this, if more than 3 trillion yen was actually spent, it would be a headache for the Ministry of Finance and the Bank of Japan to recover around 70% of the decline in just two business days. Of course, if the dollar/yen pair rises further from here, there is a high possibility that another intervention will be implemented, and there may even be another intervention on the scale of 3 trillion yen. However, it is thought that the effect will gradually decrease, and the yen will soon rebound in the direction of a weaker yen.

If that happens, speculative movements may gain momentum if they do poorly. After that, I would like to have foreign tourists and investors come to Japan in large numbers as soon as possible, buy the extremely weakened yen, and purchase Japanese products and services that maintain their quality. , I will have to wait for you to invest in assets.

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Editing: Kazuhiko Tamaki

(This column was posted on the Reuters Forex Forum. It is written based on the author’s personal opinion.)

* Toru Sasaki is Head of Market Research and Managing Director at JPMorgan Chase Bank. After graduating from Sophia University in 1992, joined the Bank of Japan. He joined JPMorgan Chase Bank in April 2003 after working in the Research and Statistics Department, the Foreign Exchange Division of the International Department, and the New York office. His books include “Will Inflation Really Increase Our Income?” and “Weak Japan’s Strong Yen.”

*Content such as news, trading prices, data and other information in this document is provided by columnists for your personal use only and not for commercial purposes. There is none. The content of this document is not intended to solicit or induce investment activity, nor is it appropriate to use the content for the purpose of making a trading or buying or selling decision. This content does not provide any investment, tax, legal, etc. advice that constitutes investment advice, nor does it make any recommendations regarding specific financial stocks, financial investments, or financial products. Use of this document does not replace the investment advice of a qualified investment professional. Although Reuters makes reasonable efforts to ensure the reliability of the content, any views or opinions provided by a columnist are those of the columnist and not those of Reuters.

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