Japan may enter the foreign exchange market for the third time this year to support the yen after the release of U.S. CPI data on Thursday, according to foreign media analysis of the Bank of Japan's accounts.

The size of the intervention, estimated at about 3.5 trillion yen ($22 billion), is based on a comparison of the Bank of Japan’s accounts with forecasts by money brokers, suggesting Japan’s monetary authorities are trying to take advantage of growing expectations for an immediate Fed rate cut after data showed a broad cooling of U.S. inflation.

Thursday’s suspected intervention would be a new development in Japan’s strategy to try to keep speculators on the defensive since it began supporting the yen in September 2022.

Some market watchers have warned that if U.S. inflation turns out to be higher than expected, this could cause the yen to depreciate, raising the possibility of intervention. But the possibility that Japanese authorities would “go with the flow” if the yen starts to appreciate is not widely expected.

“The timing of Japan’s intervention was unexpected,” said Shinichiro Kobayashi, chief economist at Sumitomo Mitsui Financial Group Research & Consulting. “They want to show that they have multiple ways to intervene as this endless struggle continues.”

Finance Minister Shunichi Suzuki and foreign exchange chief Masahiro Kanda both declined to comment on Friday whether they had intervened, as they did in response to interventions in late April that prompted local media reports that authorities had entered the market.

Speculations of intervention have increased after the yen exchange rate fluctuated suddenly. Less than half an hour after the release of the US CPI data, the yen-dollar exchange rate rose rapidly from 161.58 to 157.44, an increase of more than 4 yen, similar in size to the previous intervention.

As of Friday evening, the yen was trading around 159 to the dollar. So far this year, the yen has depreciated by more than 11%, making it the worst performing currency among major currencies.

Estimates of the size of the intervention are based on changes in the Bank of Japan's accounts. The Bank of Japan reported on Friday that its current account was likely to fall by 3.2 trillion yen on the next business day, Tuesday, due to government fiscal factors. By comparison, before Japan's alleged intervention, the average forecast of private currency brokerages including Central Tanshi, Totan Research and Ueda Yagi Tanshi was for an increase of 333 billion yen.

Yuichiro Takai, an analyst at Totan Research, said:

"There is a high probability that they seized the opportunity of a stronger yen and weaker dollar to intervene after the release of the U.S. CPI data and boosted the yen by less than 4 trillion yen."

It turns out that comparing the money brokers’ estimates with the Bank of Japan’s current account forecasts provides an accurate calculation of the approximate cost of past foreign exchange interventions by Japanese authorities since September 2022.

In further evidence of the Japanese government’s intervention, Thursday was one of the busiest days for yen spot trading since November 2016, according to CME data. On CME’s EBS spot platform, dollar-yen volume was about $53 billion, the fourth-highest since Jan. 1, 2022, a CME representative said in an emailed response to questions.

Earlier this year, the Japanese government spent a record 9.8 trillion yen in interventions in late April and early May to support the yen after it fell to a 34-year low against the dollar. Foreign media estimated at the time that Japan's intervention was 9.4 trillion yen.

Official monthly intervention data will be released on July 31, when Kanda Masato resigns in a routine bureaucratic personnel shakeup and is replaced by Jun Mimura, currently head of the Ministry of Finance’s international bureau.

The government faces a dilemma in foreign exchange markets. Inflation has remained above the Bank of Japan’s 2% target for more than two years, with the yen a key driver. Consumer spending fell in every quarter of the year to March as real wages fell.

One of the main factors behind the yen’s weakness is the interest rate differential between the U.S. and Japan, especially the difference in long-term debt yields after accounting for inflation. This suggests that a rate hike by the Bank of Japan or a rate cut by the Federal Reserve could help boost the yen.

The Bank of Japan has repeatedly said it does not target the yen and has resisted making significant changes to its policy to support the currency. But BOJ Governor Kazuo Ueda has said policy could change if a weak yen is seen as altering the outlook for inflation.

There is no consensus on the impact of the possible intervention on the Bank of Japan's policy decision on July 31. Some economists said the government's action made a rate hike more likely because the central bank would need to take the next step after the government's response. Others said a rate hike was less likely because there was less pressure on Japan to depreciate.

“The BOJ will not raise rates in July, with consumer spending and the overall economy still weak,” said Nobuyasu Atago, a former BOJ official and now chief economist at Rakuten Securities Economic Research Institute. “If they act now, it will be seen as a reaction to the yen. The BOJ is still suffering from past mistakes of being forced to cut rates after raising them.”

Article forwarded from: Jinshi Data