Japan steps in to support the yen for the first time since 1998

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(Bloomberg) — Japan intervened to support the yen for the first time since 1998, aiming to reverse a 20% decline against the dollar this year amid widening policy divergence with the US.

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The yen rose a staggering 2.3% against the dollar, pulling sharply from the lows of the day when it crossed a key psychological level of 145 as top currency official Masato Kanda said the government was taking “bold action”.

The intervention, which came after the Bank of Japan urged it to maintain its negative rate policy even as the Federal Reserve raises aggressively, shows how a pain threshold was reached as hedge funds continued to add to short bets on the yen. The question now is whether the unilateral action will work.

“At best, their action could help slow the pace of the yen’s depreciation,” said Christopher Wong, currency strategist at Oversea-Chinese Banking Corp. lower or the BOJ will adjust its monetary policy.”

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Currency intervention is an extraordinary move for a country that has long been criticized by trading partners for tolerating or even encouraging a weak currency to take advantage of its exporters. The last time Japan strengthened the yen with direct intervention was during the Asian financial crisis in 1998, when the exchange rate hovered around 146 and threatened a fragile economy.

It had also previously intervened at levels around 130 to weaken the currency in 2011.

Against the dollar at 5:54 PM in Tokyo, the yen rose 1.7% to 141.71. Kanda had called the moves against the currency sudden and one-sided when he announced the intervention.

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The Japanese authorities have issued more verbal warnings in recent weeks and the Bank of Japan has carried out the latest move in the foreign exchange market, a so-called interest rate check to warn against speculative bets.

How does Japan intervene in currency markets?: QuickTake

On Thursday, BOJ governor Haruhiko Kuroda and his fellow board members kept the BOJ’s yield curve monitoring program and asset purchases unchanged on Thursday, as widely expected. The head of the central bank later said in a briefing that it may not be necessary to change forward guidance in two or three years and that there is no prospect of a rate hike in the near term.

The yen is underperforming among the group-of-10 currencies. Japanese companies and households are increasingly talking about the negative effects of the weaker currency as input and energy costs skyrocket. A further decline will strain consensus between a central bank determined to fuel inflation and a government desperate to avoid a cost of living crisis.

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“For now, we may see yen shorts slide off somewhat, especially if the BOJ continues to intervene in the market on behalf of the Treasury Department early next week,” said Jian Hui Tan, strategist at Informa Global Markets. “What it’s probably doing is buying Japan some time, in the hopes that broad USD strength moderates somewhat and can slow further yen depreciation.”

(An earlier version of this story was corrected to note that this was Japan’s first intervention to strengthen the yen since 1998, as it had weakened the currency in 2011)

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