Did the MOF interventions work?

On Wednesday, US economist Brad Setser argued in the Financial Times that the interventions by the Japanese Ministry of Finance (MOF) in favor of the yen were very effective, regardless of the monetary policy of the Bank of Japan (BoJ). Time to roll up the stones again, then, Commerzbank’s Head of FX and Commodity Research Ulrich Leuchtmann notes.

JPY depends on the fundamentals

“The interventions have not had any lasting effect on JPY exchange rates so far. The MOF repeatedly let earlier intervention levels slip away. Their effect on USD/JPY only became sustainable when they were accompanied by idiosyncratic USD weakness and, in particular, when it became foreseeable that the BoJ's monetary policy would turn.”

“Most of the MOF's foreign exchange reserves may have been purchased at much lower USD/JPY rates.The MOF makes a profit from interventions if they are successful, i.e. if USD-JPY trades sustainably lower due to the interventions. Otherwise, it makes a loss.”

“A credible USD/JPY ceiling affects USD/PY prices well below this ceiling and that USD/JPY does not even come close to this ceiling. This is the old Krugman model of target zones for exchange rates, and we have not had a situation in which the Krugman model would apply. This all means that JPY depends on the fundamentals, mainly on the BoJ's monetary policy. The MOF cannot prevent fundamentally justified JPY levels in the medium to long term.”

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