BOJ: “Soft” FX Intervention

Published on February 11, 2016

Dollar Yen bounced sharply this morning off the 111.00 area following a sustained ten day vicious collapse from the 121.00 level on fear and safe haven trades after the Bank of Japan surprised (and worried) markets by cutting rates into negative territory at its January 29 meeting.

That sharp rebound has markets wondering if the Bank of Japan may have intervened in the currency markets on behalf of Japan’s Ministry of Finance – the government body authorized to order currency interventions when needed.

*** It is our understanding that the BOJ did not actually intervene, but did undertake “rate check” calls to certain banks, where the BOJ calls banks to “check” what current levels are, with the implicit questioning of whether they have intentions of buying more yen and in order to exert psychological pressure to restrain those purchases. The BOJ’s New York office will sometimes do that to US banks as well as some sort of oral intervention. ***

*** While “rate checks” may not constitute explicit purchases of dollar/yen, they are nevertheless intended to be strong warning shots to markets of potential interventions to come. And that type of soft, perhaps even leading to actual, intervention is perfectly acceptable to global central banks and monetary authorities if the intention is to stem volatility. ***

While there appears to be some confusion in the street and blogosphere over either the G20 or G7 “rules,” or better said conventions, on FX intervention, the agreement is to avoid “competitive devaluations” and allow markets to determine rates. But monetary authorities very much reserve the right – and indeed are encouraged – to intervene any time as needed to counter “excess volatility” in FX markets.

And despite some seemingly confused commentaries to the contrary, governments do not need to seek “permission” from their currency counterparts to conduct intervention (for example from the US Treasury to buy dollar/yen). Rather, the standard procedure is to give the other side a courtesy heads up before intervening.

In either case, excessive volatility in FX markets is certainly enough to rationalize any kind of intervention, verbal or actual, even though intentional attempts to set floors, ceilings, or guide rates are frowned upon. And it appears the BOJ and MOF may now feel they cannot let market volatility continue to soar much farther from here.

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