Bank of Japan could intervene this week to boost the yen as currency hits 34-year low

By Joseph Adinolfi

The dollar's advance in 2024 has weighed heavily on the Japanese yen

The Bank of Japan could intervene to support the yen as soon as Friday, possibly in a move coordinated with the Bank of Korea to help maximize its impact, according to Steven Barrow, head of G-10 strategy at Standard Bank.

If it happens, this would mark the first bout of currency intervention by the BoJ since September 2022, according to Barrow. Its last intervention initially had little impact on the exchange rate between the U.S. dollar and the yen. But over the months that followed, the yen strengthened more than 13% against the dollar, and was trading at around 130 to the buck by early 2023, Barrow said.

Traders' shifting expectations about the number of times the Federal Reserve will cut interest rates in 2024 have powered the dollar higher in 2024, causing it to strengthen against most of its rivals. The toll has been particularly harsh for the yen, as the dollar's advance has driven the Japanese currency to its weakest level in 34 years on Wednesday, with traders increasingly expecting two or fewer Fed rate cuts in 2024.

The dollar briefly traded above 155 yen (USDJPY) on Wednesday, as the below chart shows, while the ICE U.S. Dollar Index DXY, a gauge of the buck's value against a basket of its main rivals, traded at 105.84, close to its strongest level since late 2022.

The BoJ is set to meet late Thursday New York time. While macro strategists generally expect the central bank will leave its interest-rate policy unchanged, Barrow thinks policymakers could seize the opportunity to discuss a possible intervention, which could follow during U.S. trading hours on Friday, or soon after.

An intervention would come on the heels of a monumental shift in monetary policy that, so far, has failed to boost the value of Japan's currency.

At its March meeting, the BoJ delivered its first interest-rate hike in 17 years, and ended an eight-year stretch of negative interest rates in a move that macro strategists had been anticipating for nearly two years.

Barrow highlighted some similarities between the setup ahead of this week's BoJ meeting, and the central bank's previous intervention in late 2022.

The previous intervention, which occurred immediately after a BoJ meeting, was preceded by meetings between Japanese finance ministry officials and their G-7 counterparts. Similar meetings have taken place recently, including a meeting between G-7 finance ministers last week, as well as a meeting between Japanese and Korean officials with Treasury Secretary Janet Yellen.

"If history is about to repeat itself we might expect intervention as soon as Friday and, this time, it could be done in concert with the Bank of Korea given that its officials also expressed concern at local currency weakness in the three-way meeting last week with Japanese Finance Minister Suzuki and US Treasury Secretary Yellen," Barrow said.

Barrow said the BoJ dumped roughly $20 billion of U.S.-dollar denominated assets on Sept. 22, 2022, when its last intervention began. Typically, interventions are coordinated between the BoJ and finance ministry. While a fresh intervention could push Treasury yields higher, Barrow thinks this would be unlikely, as the total amount sold by BoJ wouldn't likely be large enough to move yields in the world's most heavily traded government-bond market.

-Joseph Adinolfi

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04-24-24 1441ET

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