BOJ Intervention of $59 Billion Boosts Japanese Yen
Bank of Japan Intevenes Twice to Shore up the Yen
Summary: Japanese authorities intervened in the currency market with about $59 Billion USD (equivalent to 9 Trillion Yen) to shore up the Japanese Yen. This was done through two interventions with the first one being about $39 Billion Yen. The move follows concerns among the public due to increased costs of living and reduced purchasing power. The weakening yen has impacted consumers’ ability to travel abroad for example, leading to cutbacks in spending and adjustments in lifestyle choices. While the cheap yen has benefited exports and corporate profits, it has also raised concerns about rising prices, weaker consumption, and the overall negative impact on the economy.
Key Points:
- Japanese authorities intervened in the currency market to weaken the yen, following concerns among consumers about increased costs and inflation.
- The weakening yen has affected consumers’ ability to travel abroad and led to cutbacks in spending on imported goods.
- Companies have expressed worries about higher raw material prices and weaker consumption due to the cheap yen.
- The BoJ’s struggle to justify raising interest rates while domestic consumption remains tepid poses challenges for the economy.
- While the weakening yen has benefits for exports and corporate profits, it also raises concerns about rising prices and reduced consumption. For example, this also puts pressure on companies since input costs increase in price and reduced spending by consumers hurts the top line of companies.
Further Analysis
The intervention was strategic in nature since the Japanese authorities waited till the Japanese Yen was technically at its weakest point. The weakest point happened to be the lowest level in 34 years against the dollar. If they had intervened earlier the effect would have less impact. The questions now is weather or not policy would follow by increasing interest rates. If that does not happen the intervention is just a small blip and the Yen will weaken again. With inflation at about 2% and rates at zero pressure will grow to increase rates. The recent currency declines had been driven by a gap between Japan and US interest rates.
In short, a continued weakening of the yen would have exacerbated inflationary pressures, as imported goods become more expensive for consumers. This could further dampen domestic consumption and hinder economic growth. The Bank of Japan’s balancing act of stimulating economic growth while managing inflation will become increasingly challenging in this scenario due to consumer expectations and uncertainty.
On the corporate side, the picture depends since a lot of Japanese manufacturing companies had shifted production overseas anyways. And for the financial statements, this mean that they received a boost thanks to sales in stronger currencies. In addition, the currency also helped to attract foreign direct investment (FDI) in Japan. A good example being in the technology sectors such as semiconductor plant (TSMC), Microsoft and other companies. Of course this hi-tech investment also has geopolitical reasons. Finally, the tourist sector had greatly benefited from a weak currency.
Update: the April US Payrolls Report came in at 175K versus the estimated 240K. This will be music to the ears of Japanese policy makers. In addition to having the Yen strenthen by 5, from 160 to about 155, thanks to two interventions, the FED dovish statement and weaker US payroll reports makes the intervention look stronger. Finally, a holiday in Japan provides a further push to strenghten the Yen. Thus, the policy move by Japan looks increasingly like a very strategic move and it will be difficult for speculators to fight back at this moment.
