Japan election weekend – if the yen weakens after, the BOJ could step in with intervention

Nomura say that if the yen comes under pressure next week after the election japanese authorities could step in with intervention efforts to support the currency.

The first step is verbal intervention. We’ve had some weak comments along these lines already from Japan this week, and some comments just a little less weak. Links to two examples from Thursday (Japan time) are here:

• ForexLive Asia-Pacific FX news wrap: USD/JPY drips a little lower

Nomurs, in brief:

• “The yen seems to be working as an adjustment valve at the moment, to ease everything that is pressuring Japan macro”
• the prospect of intervention will heighten if the yen weakens further after this weekend’s general elections
• weakening could also boost the probability that the Bank of Japan flags a December rate hike at its meeting next week (October 30 – 31)

USD/JPY is off its high from Wednesday:

–

If you are curious about the mechanics of intervention and why you should be watching the MoF instead of the BOJ:

• The Ministry of Finance (MOF) in Japan is responsible for formulating foreign exchange policy in the country, while the Bank of Japan (BOJ) is responsible for executing such policies, particularly in terms of FX intervention.
• The MOF can decide to intervene in the FX market if it believes (in the current situation) the yen is too weak. Once the MOF decides to intervene, it gives instructions to the BOJ. The BOJ then conducts operations in the FX market by (in current circumstances) buying yen. The Foreign Exchange Fund Special Account (FEFSA), which falls under the jurisdiction of the MOF, is used for interventions. You will note that in the current situation, where the BOJ would buy yen, they will dip into USD reserves to fund the other side of the trade, buying USD (or other currencies if needed).
• The BOJ’s operations are usually conducted through commercial banks that deal in the foreign exchange market. They may be spot transactions, or forward transactions that are set to occur at a future date. Note that while the MOF has the ultimate authority to decide when to intervene, it does so in close consultation with the BOJ. The BOJ provides expertise and advice on monetary and financial market conditions, which can influence the MOF’s decision. This collaboration reflects the balance between the roles of the two entities: the MOF as the government’s chief financial and economic advisor, and the BOJ as the country’s central bank that maintains stability in the financial system.

This article was written by Eamonn Sheridan at www.forexlive.com.