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Apr 01 - 06:55 PM

Goldman Sachs: Analyzing the BoJ's Capacity for FX Intervention

By eFXdata  —  Apr 01 - 12:30 PM

Synopsis:

Goldman Sachs provides an in-depth analysis of the Bank of Japan's (BoJ) capacity for currency intervention, estimating the available USD-denominated reserves based on the BoJ's reported FX reserves. The assessment comes amid speculation over potential interventions to support the yen, evaluating the effectiveness and implications of such moves.

Key Points:

  • BoJ's FX Reserves: The BoJ's reported FX reserves stand at approximately $1.1 trillion, with $155 billion in cash and $990 billion in securities. It's estimated that 85% of these are held in USD, equating to $130 billion in cash deposits and $840 billion in USD securities.

  • Reserve Composition and Intervention Capacity: A large portion of these reserves comprises a mix of fixed income and equity securities, with cash deposits primarily utilized for intervention operations. Goldman Sachs estimates that the BoJ has around $175 billion of USD-denominated reserves readily available for intervention without the need to liquidate longer-term securities.

  • Effectiveness of Intervention: While the BoJ possesses significant resources for intervention, its impact may be limited unless it aligns with broader macroeconomic trends, involves international coordination, and surprises the market. Previous interventions, such as those in 2022, demonstrate these criteria.

Conclusion:

Goldman Sachs' analysis underscores the BoJ's substantial financial capability for currency intervention but also highlights the strategic considerations that determine its effectiveness. While the BoJ has the means to undertake interventions of a scale similar to 2022, the success of such actions hinges on broader macroeconomic alignment, cross-border cooperation, and the element of surprise.

Source:
Goldman Sachs Research/Market Commentary

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