The business week has started with something we have not seen for quite some time
TOKYO, Aug 2 (Reuters) – Japanese Finance Minister Satsuki Katayama will announce on Monday that Tokyo and Washington took joint action in the currency market to arrest the yen’s slide to 40-year lows, two Japanese government officials told Reuters.
I suppose I could add that an announcement like that on a Sunday is significant in itself. But the main message is that concerted currency intervention is back and with the size of the move with a bang. Or as the Financial Times put it.
The US Treasury intervened in yen exchange rates on Friday, marking the first time Tokyo and Washington joined forces to support the Japanese currency via outright purchases in nearly 30 years.
What has happened?
First we need to look back to Thursday when the Bank of Japan stepped up to the plate.
The Japanese government bought yen for dollars in New York trading hours on Thursday, a market source told Reuters, with Bank of Japan data suggesting it sold as much as $58.97 billion to support the yen.
It looks as though reaching 164 versus the US Dollar was all too much and this phase of intervention saw a lot of volatility and pushed the Yen through 160. But then there was a problem and it came from the Bank of Japan itself.
Tokyo’s initial intervention came hours before the BOJ decided on Friday to keep monetary policy steady while signalling a strong chance it would raise interest rates soon. A widening rate differential with the U.S., where the Federal Reserve has dramatically shifted to a more hawkish stance, has been a key factor in the dollar’s rise against the yen. (Reuters)
It does not matter how often the Bank of Japan lets them down on this front journalists always believe that next time will be different. They have missed the point I made on October 2nd 2023 that it cannot afford to do so because of the cost to its balance sheet.
Anyway the Yen began to weaken again so we saw this.
the yen spiked in what markets suspect may have been another bout of yen-buying intervention by Tokyo. (Reuters)
We also saw some more open mouth operations.
“Going forward, as the official responsible for currency policy, I would like to respond in close coordination with monetary policy,” Katayama’s top currency diplomat, Atsushi Mimura, told reporters after the yen’s spike on Friday, suggesting the MOF and BOJ were working hand in hand to combat the weak yen. (Reuters)
The chance for “close coordination had of course been ignored only a few hours earlier by the Bank of Japan.
The US Cavalry arrives
Next we saw this.
Also on Friday, the U.S. Treasury informed a number of banks that it might intervene in the yen market and that they should “stand ready for future action”, a source familiar with the matter told Reuters.
In itself this was unusual but in some ways not that great a surprise as the United States would no doubt want the Yen’s competitive devaluation to end. But then something unusual did happen.
The Federal Reserve Bank of New York undertook the unusual move of conducting a sale of euros to buy yen on behalf of the Treasury, according to three people familiar with the matter.
The sales were conducted through Goldman Sachs and Morgan Stanley, according to two of those people. (Financial Times)
It may well be that they acted against the Euro so it would be noticed although more likely perhaps in a MAGA world they wanted to avoid selling the US Dollar. Either way things had got a lot more serious on the Yentervention front.
The open mouth operations continued with this on Twitter or X from US Treasury Secretary Scott Bessent.
Japan’s economy continues to perform well under Prime Minister Takaichi, Governor Ueda, and the Bank of Japan Board, which has demonstrated a strong commitment to monetary and financial stability. We continue to enjoy a strong relationship and close coordination.
The part about the Bank of Japan is clearly not true as otherwise none of this would be necessary. So this was for those who do not understand what is happening.
Then there was this.
CAMP DAVID, Maryland, July 31 (Reuters) – U.S. Treasury Secretary Scott Bessent on Friday exposed a “to-do” list during President Donald Trump’s cabinet meeting indicating he was contemplating U.S. purchases of $5 billion to $10 billion worth of Japanese yen, a Reuters photograph taken during the meeting held at Camp David shows.
You can take your pick as to whether he was being incompetent or this was deliberately left there to be seen. But over the weekend we saw more rhetoric and open mouth operations. This morning it looks like the Bank of Japan arrived again and drove the Japanese Yen towards 155. and as I type this it is at 157.05.
FX Swaps
These have been quiet for a while but they are back according to Japanese Minister of Finance Katayama san.
Japan also plans to utilize the Federal Reserve’s Foreign and International Monetary Authorities (FIMA) Repo Facility in the future.
Other Currencies benefit
There has been relief for other currencies as whilst they will be sold against the Japanese Yen they have rallied against the US Dollar as spread trades as activated. It has for example stopped what looked like a weakening by the UK Pound £ which is now US $1.3450.
Comment
There is clearly more to this than meets the eye. In my opinion we may not have far to look.
FT Exclusive: Ken Griffin’s Citadel swooped in to buy a large portion of hedge fund Situational Awareness’ $16bn public equity holdings after former OpenAI employee Leopold Aschenbrenner’s investment firm endured steep losses in the AI sell-off.
This happened on Thursday and I wonder if things were squared up for some by getting them out of the Japanese Yen at a better level?
Also there was this on Friday as fears rose that the Japanese would finance this by selling some of their holdings of US Treasury Bonds. This saw the US 30-year rise to another post credit crunch high at 5.27%. So we see why FX Swaps were suddenly pit into play.
At this point we have intervention in the Japanese Yen and implied intervention in equities and bonds. Not much has been left out…