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  • Writer's pictureSieracki Milosz

USDJPY – Understanding the Intervention Threshold | Bank of Japan, Federal Reserve and Market

Updated: Aug 2, 2023

USDJPY – Decoding the Intervention Threshold and Market Dynamics


Money Dollars and Japanese yen against the market charts

The USDJPY market has been closely watched by traders and investors worldwide due to its impact on global trade and financial markets. The exchange rate between the US dollar and the Japanese yen is subject to fluctuations influenced by various factors. One important aspect to consider is the intervention threshold set by the Bank of Japan (BOJ). In this article, we will explore the recent interventions, the current state of USDJPY, and the factors that determine the intervention threshold.


Outline of the Article


1. The BOJ's Intervention in September and October 2022


In September 2022, the Bank of Japan decided to intervene in the USDJPY market when the exchange rate reached 145 against the US dollar. This marked the first intervention by the BOJ since 1998. The objective of this intervention was to strengthen the yen. The BOJ intervened again in October when the yen further declined, reaching its lowest level in 32 years at 151.94 against the dollar.


2. Recent Decline of USDJPY


Currently, the USDJPY stands at 141.32 yen, which represents a decline from its previous levels. The weakened US dollar has played a significant role in this decline. Remarks made by Federal Reserve officials, along with lower-than-expected US nonfarm payrolls for June, have contributed to the depreciation of the US dollar.


3. Investors' Short Position in the Yen


Investors currently hold a substantial short position in the yen, valued at $9.793 billion. This position represents the largest short position in the USDJPY market since May 2022. Remarkably, Eisuke Sakakibara, the former Japanese Vice Finance Minister, has suggested that the USDJPY could reach 160 before the BOJ intervenes again.


4. Speculations on the Intervention Threshold


The intervention threshold for the BOJ remains uncertain and is subject to speculation. Traders and analysts closely monitor the USDJPY to identify the point at which the central bank may intervene. The recent decline in the exchange rate has created a buffer, indicating that the intervention threshold might be higher than the current level. However, the exact threshold remains unknown.


5. Impact of Federal Reserve Remarks


The US dollar's recent weakening can be attributed to remarks made by Federal Reserve officials. These statements have created a perception that the US central bank is nearing the end of its tightening phase. The anticipation of a rate increase during the upcoming meeting has shifted the market's expectations. However, the timing and frequency of subsequent rate hikes are still uncertain.


6. Anticipated Rate Increase by the Fed


There is widespread anticipation that the Federal Reserve will implement a rate increase during its upcoming meeting. If this decision is implemented, the policy rate range would be set between 5.25% and 5.50%. However, the future rate hikes remain uncertain. Questions arise regarding whether the Fed will raise rates again in September, delay until November, or maintain the current stance and allow inflation to naturally subside over time.


7. Current State of USDJPY


As a consequence of recent developments, the US dollar has declined against the yen, reaching a low of 141.32 yen, the lowest level observed since June 21. At present, the USDJPY is down 0.5% at 141.328. This drop follows a decrease of nearly 1.3% witnessed last Friday when the US nonfarm payrolls for June fell short of market expectations at 209,000.


Conclusion


The USDJPY market is influenced by a combination of factors, including the intervention actions of the Bank of Japan and the monetary policy decisions of the Federal Reserve. The recent decline in the USDJPY exchange rate can be attributed to a weakened US dollar caused by remarks from Federal Reserve officials and lower-than-expected US nonfarm payrolls. The intervention threshold for the BOJ remains uncertain, and market participants closely monitor the exchange rate for any signs of future intervention.


FAQs


1. How often does the Bank of Japan intervene in the USDJPY market?

The frequency of intervention by the Bank of Japan in the USDJPY market depends on various factors, including market conditions and the central bank's monetary policy objectives. There is no predetermined schedule for intervention, and the BOJ assesses the situation and intervenes as deemed necessary.


2. What factors determine the intervention threshold for the BOJ?

The intervention threshold for the Bank of Japan is determined by a combination of factors, including the exchange rate levels, market conditions, economic indicators, and the BOJ's monetary policy goals. These factors are carefully assessed to determine the appropriate level at which the BOJ may intervene in the USDJPY market.


3. How do Federal Reserve remarks affect the USDJPY exchange rate?

Remarks made by Federal Reserve officials can have a significant impact on the USDJPY exchange rate. Statements regarding monetary policy decisions, interest rates, or the overall economic outlook can influence market sentiment and affect the strength of the US dollar. Traders and investors closely monitor these remarks for insights into future Fed actions, which can subsequently impact the USDJPY exchange rate.


4. What are the implications of a weakened US dollar for the USDJPY exchange rate?

A weakened US dollar can lead to a depreciation of the USDJPY exchange rate. When the US dollar loses strength, the yen gains relative strength, causing the exchange rate to decline. This can have implications for international trade, investment flows, and financial market dynamics.


5. How do market participants interpret the recent decline in USDJPY?

The recent decline in the USDJPY exchange rate has been interpreted by market participants as a reflection of a weakened US dollar. The remarks from Federal Reserve officials and lower-than-expected US nonfarm payrolls have contributed to this decline. Traders and investors closely analyze these developments and adjust their strategies based on their interpretation of market conditions and expectations for future movements in the exchange rate.


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