Bank of Japan (BoJ) – Foreign Exchange Intervention

Bank of Japan (BoJ) – Foreign Exchange Intervention

The Bank of Japan’s ultra-loose monetary policy is under pressure from an array of global central banks embarking on a series of rate hikes and balance sheet reduction programs. As many central banks, including the Federal Reserve (Fed) and the Bank of England (BoE), attempt to navigate a delicate path of suppressing runaway inflation while leaving their economies with enough liquidity to develop, the BoJ has another set of problems, namely anemic growth and persistently below-target inflation. As interest rate differentials widen between Japan and other major economies, the Japanese yen continues to weaken. And the Bank of Japan is not just letting this happen, it seems to be actively encouraging this decision.

Interest rates and Forex market

The benefits of a weaker currency

A weak currency, relative to its peers, helps boost a country’s export sector by making its products more competitive than its rivals. These additional sales, in turn, help to stimulate economic growth, the job market and the countries’ balance of payments. A weaker currency also makes imports more expensive, pushing inflation higher. By moving its currency up or down, a country can help steer its economy towards the desired landing zone without having to resort to punitive domestic fiscal measures.

Central Banks and Monetary Policy: How Central Banks Set Policy

While in theory moving one’s currency to accommodate domestic politics seems economically prudent, currency manipulation is frowned upon, especially by its major trading partners. The US Treasury has a set of guidelines for what it considers to be currency manipulation and if these are adhered to, the US will engage with the country concerned to eliminate the unfair competitive advantage that this manipulation has created. If all else fails, the United States can invoke trade sanctions against its counterpart.

A history of Bank of Japan intervention

The Bank of Japan has actively intervened in the foreign exchange market many times since the Japanese yen floated against the US dollar in 1973. The central bank has intervened many times over the past 25 years to maintain the attractiveness currency to help exporters or to try and weaken the currency to stimulate growth and inflation. The Bank of Japan introduced quantitative easing in early 2000 in an attempt to stimulate inflation by offering to buy huge amounts of government bonds at fixed interest rates. The program was enhanced numerous times to increase the number of bonds the central bank would buy, adding asset-backed securities into the mix, and then including stocks in the basket of assets the BoJ would buy. The Bank of Japan is currently the largest holder of Japanese stocks, through various ETFs, and owns about 50% of the Japanese bond market.

The Bank of Japan: A Forex Trader’s Guide

The monthly USDJPY price chart shows a series of sharp long-term reversals in the currency pair as the Bank of Japan changes course on monetary policy.

USD/JPY monthly price chart

Source: ProRealTime

Talking Japanese Yen Up and Down

Like other central banks, market communication is an essential and powerful tool that the Bank of Japan uses to guide the value of the yen. As the currency approaches a certain level, the Bank of Japan becomes more vocal about what level it would be comfortable with. If the currency becomes too expensive for the BoJ, they will try to “turn it down”, while if the currency is too weak, they will let the market know by “pushing the currency up”. For a bank to be successful in talking up or down a currency, it must have credibility in the market or a habit of backing up its views with concrete actions. The monthly chart shows that the 125.00 level has held for nearly two decades as it was seen by the market as the BoJ line in the sand. This level is now exceeded.

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