Bank of Japan goes tora, tora, tora

The Bank of Japan has intervened in the currency markets this morning, only this time rather than rate-checking the USD/JPY rate they actively intervened by selling US dollars for the first time since 1998.

Today’s move came only hours after the central bank left its own monetary policy unchanged in the face of a rising inflation rate, albeit at a much lower rate of 3%.

The failure to show any active sign that it was going to alter its monetary policy settings was taken as a green light by traders to push the US dollar to a new 24 year high above the 145.00 level, to a new peak of 145.90.

The speed of the yen declines only hours after this morning’s policy decision and the Fed’s decision to carry on hiking rates raised the very real prospect that we could well see a move towards 150.00 in the next few days. 

This appears to have prompted concern on the part of Japanese authorities and this morning’s aggressive action certainly appears to have caught the markets unawares, sending the US dollar sharply lower.

The big question is whether it will make a difference and change the long-term direction of the Japanese yen’s decline.

The 145/146 level does appear to be a level the Bank of Japan seems keen to defend at the moment given that last week’s rate check happened around similar levels.

Today’s intervention was confirmed by the Japanese government with Masato Kanda commenting that Japan had taken “bold action” in the markets to address “sudden” and “one sided” moves.

He went on to say that they had no choice but to respond to these “excessive” moves and retained the option to act further.

The big question now is whether this morning’s action will make any difference.

It probably will in the short term, as it will flush out any weak long US, short yen positions, which means we could see a move through the 141.00 area and a move towards 140.00.

If the Japanese authorities want to press home their advantage, they might want to consider intervening further over the next few days in order to drive the US dollar below 140.00.

This will be tough to do with current monetary policy settings which are set in the opposite direction of today’s intervention on the markets. 

Today the Bank of Japan had the opportunity to modestly reset its policy settings on monetary policy and failed to do so, resulting in the move up to 145.90 we saw this morning.

This means that once the dust has settled on today’s intervention, we could well see another move up towards 145.00 and 150.

The main reason the Japanese yen is weak is because of the current policy stance of the BoJ, and the fact that rates are negative at -0.1%.

Today’s intervention has gone some way to slowing the pace of the decline in the yen, however its unlikely to change it, with monetary policy settings at current levels.