Japan's top monetary official continued to try to keep speculators on their toes amid signs of a possible change in the government's yen strategy, playing down a report that officials had confirmed intervention in currency markets.

“We will not give any answer as to whether or not there was intervention,” Masato Kanda, vice finance minister for international affairs, said Friday morning after the report was released.

The yen swung wildly on Thursday night after weaker-than-expected U.S. inflation data, sparking speculation that Tokyo may have taken advantage of the early moves to step in and build momentum.

If the move proves to be intervention, it would mark a new development in Japan’s strategy to destabilize and contain yen shorts. Details of changes in the Bank of Japan’s overnight accounts, due later on Friday, could provide more clarity on whether Japan is involved in the market.

Some market watchers are already wary of the possibility of intervention if U.S. inflation proves hotter than expected, sending the yen tumbling as Japan heads into a holiday weekend. But if the yen starts to strengthen, the possibility of government intervention is not on the table.

Kanda sought to maximize the impact of monetary policy by repeatedly leaving markets in doubt about Japan’s actions. While that did little to change the broader dynamics of the market, it helped create a level of uncertainty that made speculators unsure when Tokyo might suddenly step in to buy yen.

If Japan intervenes in the yen's appreciation, it would indicate that Kanda is increasing the unpredictability of the authorities' actions in an attempt to disrupt speculators who are actively shorting the yen.

In terms of size and scope, last night’s market moves had many of the hallmarks of intervention. The yen appreciated sharply from around 161.58 to 157.44 following the release of the US inflation data, a move of more than 4 yen in less than half an hour, consistent with most previous interventions.

Japanese authorities kept uncertainty levels high. The Bank of Japan conducted a so-called rate check in the foreign exchange market, a precursor to possible intervention, according to a trader with direct knowledge of the matter.

Kanda's initial interventions in October 2022 and earlier this year were followed by further moves in the following days, which may make traders cautious about the yen when liquidity is low on Fridays or during holidays in Tokyo.

Local media reports indicated that the Japanese government had taken action anyway. Although Kanda did not immediately confirm it, according to his strategy, Japan will eventually provide figures on the intervention in accordance with its international commitments to ensure transparency in monetary policy.

The next monthly intervention data is scheduled to be released on July 31, when Kanda will step down and be replaced by Jun Mimura, currently director-general of the Ministry of Finance’s international bureau.

The same day, the Bank of Japan will also wrap up its latest monetary policy decision, with some economists expecting the central bank to raise interest rates while also announcing plans to reduce its sovereign debt purchases.

Nomura International said potential intervention by Japan's Ministry of Finance in the foreign exchange market on Thursday to support the yen could prompt Bank of Japan policymakers to tighten policy accordingly.

“Given what happened today, we should keep in mind the scenario that BOJ policy board members will consider whether the bank must also take some actions in line with the government’s moves,” Nomura currency strategists Yujiro Goto, Yusuke Miyairi and Jin Moteki wrote in a note on Thursday.

Japan spent a record 9.8 trillion yen ($62 billion) between late April and early May to support the yen as it slumped to a 34-year low against the dollar, more than the total amount it will use to defend the currency through 2022. Kanda’s timing of the intervention ensured that disclosure of the intervention would come a month later.

Kanda also refused to confirm whether Japan intervened after the rapid appreciation of the yen in October 2023. The sharp market fluctuations at that time were actually due to a combination of market anxiety and algorithmic trading, which gave the impression that the Japanese authorities had intervened, and this result still raised the vigilance of speculators.

If this latest move is proven to be interference, it is likely to face criticism from other major countries, including the United States.

U.S. Treasury Secretary Janet Yellen has repeatedly said currency intervention should be a rarely used tool and that officials should give fair warning in advance. She said in May that the Group of Seven had agreed not to intervene in exchange rates except to curb extreme volatility.

Typically, Japan defends intervention by arguing that the exchange rate has depreciated sharply in a matter of hours, and gets acquiescence from other countries. If the Bank of Japan had acted on Thursday, after the dollar-yen exchange rate had remained in the 161 range for two days, it would hardly have been a dramatic move that threatened economic stability.

Kanda, who has spoken about the impact of a sharp and prolonged currency depreciation, said late Thursday that Japan's import prices have recently risen by about 9.5%, of which 9.2% is due to the depreciation of the yen.

Article forwarded from: Jinshi Data