Tokyo’s Expensive Yen-tervention Drive Begins to Look Desperate, Bets Against JPY Pile Up Yet Again

Despite a record expenditure on intervention in foreign exchange markets last month, the Japanese government is struggling to wrangle its currency’s stubborn depreciation against the US Dollar. The USD/JPY crossed the 160.00 threshold for the first time in over three decades this month, indicating that verbal intervention and direct purchases of Yen have thus far yielded little success in staving off a continued softening. In fact, traders’ bets on further bearishness in the Yen have only expanded throughout the past several weeks. 

A portion of the weakening in the Yen can be chalked up to continual shifts in real rates – specifically, the divergent paths of inflation in the US and Japan – but a more frightening reality for Japan’s Finance Ministry is that the market perceives them as desperate. With a narrowing stable of options left, Tokyo may simply have to continue doling out big bids for their own currency until the Bank of Japan feels comfortable hiking rates. Such action could itself be prompted by further currency depreciation, potentially increasing import prices and stoking inflationary pressures.

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Despite the Japanese Ministry of Finance’s (MoF) demonstrated willingness to intervene in foreign exchange (FX) markets, armed with tens of billions of dollars, the Yen’s exchange rate with the US Dollar (USD/JPY) is continually being dragged toward the 160.00 threshold. The recent crossing of that level was the first such devaluation of the Yen since 1990 and funds have been increasing their bets on more downside for the Japanese currency once again. In the first week of June, the CFTC’s Commitment of Traders report showed the speculative net short on the Yen at roughly 132,100 contracts – down from their second-highest total in history at 179,900 in late April. However, the most recent report indicates the net short has widened once again, re-expanding to 147,800 contracts in the week to June 24.

While Japan’s top currency official Masato Kanda warned this week that authorities are ready to intervene 24 hours a day if necessary, Tokyo’s attempts to verbally strengthen the Yen are clearly doing little to stop the bleeding. The MoF and officials in other sections of the government have been talking up action on exchange rates since the currency was trading at much lower levels. There is an increasing risk that direct action in FX markets is now losing its ability to stabilize the situation as well. Hanging over the Yen is the prospect of intervention’s diminishing returns and its ability to potentially work against its intended goals if utilized too frequently.

These operations are largely psychological in nature. As much as the Japanese government wants to create a significant temporary bid for JPY by utilizing USD assets it has in reserve, thereby driving up the value of its own currency, it also wants to…