Synopsis: Credit Agricole delves into the age-old debate surrounding the efficacy of FX interventions, examining Japan's recent experience as a case study. The discussion sheds light on the outcome of Japan's attempts to support the JPY through FX intervention, emphasizing the significance of underlying fundamentals over short-term manipulative measures.

Key Highlights:

Historical Context and the JPY Round Trip:

• Around a year back, the Ministry of Finance (MoF) in Japan prompted the Bank of Japan (BoJ) to initiate FX interventions, aiming to bolster the JPY.
• Approximately USD 65 billion was expended by the BoJ for JPY purchases in September and October of 2022.
• A year later, history seems to repeat itself, with the USD/JPY hovering around the 150 mark, similar to its position in 2022. The JPY's nominal TWI too is observed below its October 2022 levels.

BoJ's Intervention – Success or Coincidence?

• While the USD/JPY initially dropped post-intervention in 2022, falling from a peak of 151.95 in October to a low of 127.23 by January 2023, the question arises whether this decline was genuinely an outcome of the intervention.
• It is posited that the change in underlying fundamentals, rather than the FX intervention, was the primary driver of this shift. The intervention, in essence, provided a temporary reprieve for the MoF, allowing the currency to realign with changing fundamentals.

Driving Factors Behind JPY Movements:

• The variations in the USD/JPY were strongly influenced by shifts in the short-term rates differential between the US and Japan, and the box yield spread.
• An unexpected cooling of US inflation led markets, albeit inaccurately, to project an end to the Fed's rate hikes and even anticipate rate reductions in 2023.
• Concurrently, the BoJ made a strategic move by expanding its 10Y JGB yield tolerance band from +/-25bp around 0.0% to +/-50bp in December 2022. This not only impacted the US-Japan 10Y yield spread but also set market expectations for further Yield Curve Control (YCC) adjustments post-April 2023, aligning with the end of Governor Haruhiko Kuroda’s tenure.

Closing Thoughts: Interventions in the FX market, while impactful in the short term, cannot override or alter long-term currency trajectories dictated by fundamental market dynamics. Japan's experience serves as a testament to the limited power of interventionist strategies in the face of evolving economic landscapes.