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Japan Buys Yen for First Time in 24 Years, Currency Rallies

Japan intervened in the foreign exchange market by buying yen for the first time in 24 years, shortly after the Bank of Japan confirmed it would maintain ultralow interest rates. This action caused the currency to fall and created a more stable market.

September 22, 2022
6 minutes
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Japan intervened in the foreign exchange market by buying yen for the first time in 24 years, shortly after the Bank of Japan confirmed it would maintain ultralow interest rates. This action caused the currency to fall and created a more stable market.

The intervention was the latest example of global concern triggered by the strong dollar. The dollar has gained ground on the back of the Federal Reserve’s interest-rate increases.

The fallout from the trade war is affecting economies around the world, and Japan is no exception. As the world's third-largest economy, Japan is feeling the pinch from higher prices on essential imports like oil, natural gas, and food. These imports are typically denominated in dollars, so they cost more in yen terms. This is putting pressure on the Japanese economy and causing hardship for businesses and consumers alike.

The dollar rose near 146 yen after Bank of Japan Gov. Haruhiko Kuroda hinted that interest rates in the country were likely to stay near zero for the next couple of years. This is good news for those who are looking to invest in Japan, as it means that the country is committed to keeping its economy stable.

The government stepped in less than an hour after Mr. Kuroda stopped talking, selling dollars and buying yen in the market. This is the first such operation since 1998. The move resulted in an initial success, with the yen rising within minutes to around 141 yen to the dollar. However, this is still far below the level set earlier this year when the dollar was trading at around 115 yen. As of Thursday evening Tokyo time, the yen was trading at around 142.65 yen to the dollar.

The main reason for the dollar's strength against the yen is the difference in interest rates between the United States and Japan, traders have said.

On Wednesday, the US Federal Reserve raised interest rates by three quarters of a percentage point, signaling additional large increases to come. A half-day later in Japan, the central bank decided to maintain short-term interest rates at minus 0.1% and its target for the 10-year Japanese government bond yield at around zero.

Mr. Kuroda said that the bank has no plans to raise interest rates at this time. He reiterated the bank's guidance that it will maintain easy monetary policy for the foreseeable future, which he defined as two to three years. The reason for this, he said, is that he does not believe that Japan's current inflation rate of 3% is likely to last. Kuroda said at a news conference on Thursday that it is almost certain that the pace of price increases will fall below 2% next fiscal year and beyond. The next fiscal year in Japan begins in April 2023. Inflation in Japan is much milder than in the U.S., where prices have been rising at a pace exceeding 8%.

Mr. Kuroda said that the yen's recent fall is due to speculative trading, but that the Japanese economy is still recovering from the Covid-19 pandemic. He reiterated that the bank would continue monetary easing in order to support the economy.

In recent months, traders have generally ignored statements by Japanese officials expressing concern about the yen’s decline, assuming Tokyo wasn’t ready to take action to support the currency. However, that may be changing now, analysts said.

Mitsubishi UFJ Morgan Stanley Securities strategist Naomi Muguruma has suggested that speculative traders may become more cautious over verbal intervention, thinking that any comments by the finance minister could mean something.

However, the effects of the weak yen may only be temporary, as there are still fundamental factors that are causing it to remain weak, such as Japan's trade deficit and the interest rate gap between Japan and other countries. This is according to Ms. Muguruma.

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