Bank of Japan intervenes in the currency market to stop the yen from falling

Japan is trying to strengthen the weakening yen. In the currency market on Thursday, Japan intervened to buy its currency for the first time since 1998.

The move, which occurred at the end of the Asian session, resulted in the dollar falling more than 2% to about 140.3 yen. There were no further signs of intervention or assistance to the Bank of Japan from other central banks, and last time the dollar fell about 1.25% to 142.25 yen.

Most central banks are struggling with rising inflation. This can be seen in a general tightening of monetary policy. Despite this global wave, the Bank of Japan's decision was to maintain its ultra-soft policy, which had an influence on the exchange rate. Previously, the dollar traded more than 1% higher.

When asked by journalists about the bank's intervention, Vice Minister of Finance for International Affairs Masato Kanda gave a positive answer and said that definitive actions had been taken.

This year the yen has weakened by nearly 20%, falling to a 24-year minimum. Analysts express doubts about the chosen way to stop the long-term currency fall, because the aggressive increase in interest rates in the U.S. promotes the dollar growth.

According to Stuart Cole, chief macroeconomist at Equiti Capital in London, the number of verbal interventions coming in has increased over the past few weeks, so the market was expecting some intervention at some point.

Cole also added that the success of currency interventions is rare and he believes that this move will only provide a temporary pause for the yen.

Finance Minister Shunichi Suzuki refused to provide information about the amount of money spent by the authorities to buy the yen and about the acceptances of other countries for this purchase.

The Bank of Japan's decision was accepted by the U.S. Treasury on Thursday, but there was no confirmation for the intervention.

According to the protocol, in the case of currency intervention in relation to the dollar/yen, the informal agreement of Japan's partners in the G7, especially the United States, is required.

There was a statement from the Bank of Canada on Thursday. It says that the Bank of Canada did not participate in interventions in the foreign exchange market.

The Bank of Japan wants to support the fragile recovery of the country's economy. It decided to leave interest rates at a level close to zero. According to many analysts, the global shift to higher borrowing costs makes such a decision untenable. However, confirmation of the intervention came in a few hours after the Bank of Japan's decision.

Previously, Japan's intervention to support its currency occurred in 1991-1992 to resist the decline. And the last time Tokyo intervened was during the Asian financial crisis in 1998, coupled with the sell-off of the yen and the quick outflow of capital from the region.

It is believed that intervention by buying the yen is much more difficult than intervention by selling it.

In the case of intervention to sell the yen, Japan can continue issuing currency for sale in the market. But in the case of intervention to buy, Japan needs to involve its $1.33 trillion dollar gold and foreign exchange reserves. In such a situation, there is a risk of fast depletion if huge reserves are needed to influence rates.