Yen steadies but Japanese intervention rumours persist

Could the Bank of Japan be about to intervene in the foreign exchanges to weaken the soaring safe-haven yen? Rumours have been circulating widely in the currency markets this week after a surge in the yen from a recent high for the dollar of ¥121.70 at the end of last month to a low of ¥111.00 on Friday.

However, it was steady against the dollar throughout Friday's Asian market session despite very sharp falls for the Nikkei 225 stock market index and there was no official sign of intervention by the Japanese authorities to stabilise it.

The dollar opened the session at ¥112.20 or so, peaked at ¥112.68 and is now back in the ¥112.58 area.

The gossip suggested that Japan's central bank was "checking rates" - calling traders to ask for a quote in an effort to warn them that buying yen was a risky thing to do. It's regarded as a half-way house between trying to talk the currency down to prevent its strength from damaging the Japanese economy and actual yen selling to weaken the currency.

With the yen at its firmest against the dollar since October 2014 despite negative Japanese interest rates, analysts have already warned that intervention is possible, although it won't necessarily be successful. "Direct FX intervention is a major threat on USD/JPY moves below 115," wrote the strategists at HSBC earlier this week. "As we argued, the move to negative rates had only a fleeting impact on JPY but showed a desire for a weaker currency. It looks like we may head back to direct FX intervention but that is also hard to justify and may ultimately fail," they added.

The man known as Japan's top currency diplomat, Masatsugu Asakawa, has already said that he is watching daily exchange-rate move- ments carefully to check for excessive volatility. In an interview with the Nikkei newspaper this week, he was quoted as saying that "buying pressure has concentrated on the yen as a safe haven as global financial markets were unstable", adding that the rise in the yen had outpaced increases in other currencies since the start of this year.

However, attempts by officials to talk down the yen have failed in the past even though countering yen appreciation was a key element of Prime Minister Shinzo Abe (above)'s "three arrows" policy introduced when he was re-elected just over three years ago.

"FX markets will have to remain mindful of the intervention threat, particularly in Japan. This may take many forms, including rhetoric and more rate cuts (we expect two more later in 2016), but the growing event risk is that Japan intervenes directly in the FX market," wrote the HSBC strategists.

"Markets may mistakenly assume that, as interest rates up to 10 years are negative in Japan and yields on excess deposits at the BoJ are now negative, intervention may be more successful. After all, any counterpart to BoJ intervention will be sitting on JPY with a negative yield" they added.

"However, even in the unlikely event that any BoJ intervention is unsterilised, Switzerland's experience with FX intervention with negative interest rates shows that success is not guaranteed, even under these conditions." When currency intervention is unsterilised, the money supply is allowed to increase.

Others agree that intervention is possible but see it as unlikely. "The surge in the yen against the US dollar has understandably raised expectations of further action to weaken the Japanese currency," writes Julian Jessop, chief global economist at Capital Economics.