Synopsis:

Credit Agricole discusses the suspected foreign exchange interventions by the Bank of Japan (BoJ), acting on behalf of the Ministry of Finance (MoF), to bolster the Japanese yen (JPY). Recent significant currency moves and BoJ financial data suggest substantial interventions, raising questions about their long-term impact on USD/JPY exchange rates.

Key Points:

• Intervention Evidence: Recent sharp increases in the JPY, coupled with BoJ reports of significant drops in its current account due to fiscal activities, strongly suggest intervention efforts. Estimates suggest around JPY5.5 trillion (approximately USD35 billion) might have been spent this Monday, with similar actions suspected early today.

• Official Confirmation: Japan’s Vice Minister of Finance for International Affairs, Masato Kanda, has opted not to confirm intervention activities, maintaining a strategic ambiguity that leaves markets guessing about future moves.

• Financial Impact: Despite the high cost of these interventions, recent changes in U.S. monetary policy rhetoric and market dynamics may be aligning to support the MoF's strategy. The Fed's recent signals that rate cuts are postponed rather than canceled, alongside falling U.S. Treasury yields and a rally in global equities, have contributed to a more favorable environment for the JPY.

• Model Insights: Preliminary updates to Credit Agricole’s FAST FX model indicate a slight decrease in USD/JPY's short-term fair value, influenced by the shifts in short-term rate differentials between the U.S. and Japan and global equity movements.

Conclusion:

While the MoF's interventions have initially shown limited immediate gains, changing global financial conditions and market reactions to U.S. monetary policy may enhance the effectiveness of these efforts. USD/JPY is currently trading close to its recalculated fair value, suggesting that the MoF's expenditures on interventions might not be in vain.