Japan intervenes in FX market for first time in 24 years

Japan’s central bank intervened in the foreign exchange market today (September 22) to prop up the yen for the first time since 1998.

The move came soon after the Bank of Japan kept its ultra-low rates unchanged at a policy meeting, a decision that pushed the currency further down. “We have taken decisive action [in the foreign exchange market],” vice-finance minister for international affairs Masato Kanda said, Reuters reported.

The yen has depreciated around 20% against the dollar this year, as interest rate differentials between the US and Japan widened. While it had weakened beyond 145 earlier in the day, shortly after the BoJ decided to maintain its ultra-loose monetary policy, the currency rose to 141.15 to the US dollar after the intervention. But some analysts suggest FX intervention may do little to keep the yen from falling so long as BoJ sticks with monetary easing.

Rates unchanged

In a unanimous vote, the central bank’s nine-member policy board left its target for short-term interest rates unchanged at -0.1%. The board also maintained its commitment to keep long-term interest rates at around 0% by buying 10-year Japanese government bonds every business day.

“There’s absolutely no change to our stance of maintaining easy monetary policy for the time being. We won’t be raising interest rates for some time,” BoJ governor Haruhiko Kuroda said at a press conference after the policy decision.

The BoJ’s widely expected decision follows the US Federal Reserve’s announcement of its third 75-basis-point hike in a row.

In a statement, the BoJ noted that the Japanese economy has improved with the pandemic easing. Consumer price inflation in Japan rose to 2.8% in August, exceeding the BoJ’s 2% target for five straight months.

While the BoJ expects consumer prices to rise further towards the end of the year, it predicts the pace of inflation would slow after that. The central bank added that “extremely high uncertainties” for the economy remains. It cited the pandemic situation, the war in Ukraine, changes in commodity prices and overseas economic developments.

“It is necessary to pay due attention to developments in financial and foreign exchange markets and their impact on Japan’s economic activity and prices,” the BoJ said.

The BoJ also decided to phase out a pandemic relief scheme under which it has provided special loans to banks since 2020. It cited an improvement in the financial position of small and mid-sized firms.

The central bank will instead expand a liquidity operation targeting a broad range of corporate funding needs.