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If your job is to work out whether a blue squiggly line is heading higher or lower, BoJ interventions haven’t been the worst signal.
As the ultimate low-frequency trader, the BoJ has tended to sell the yen when it soars, then buy it back when it pukes. And so far, so good:
But, in terms of turning the tide for the currency, not all interventions have been equal.
The interventions of 2022 and 2024 didn’t exactly shake the world, despite their stonking size. By contrast, the BoJ’s 1998 and 2011 interventions stand out as pivot points. And not just because we’ve annotated them with big black dashed lines. What made them different? International co-ordination.
In June 17 1998 the BOJ were joined by the New York Fed in buying yen. The NY Fed sold a total of $833mn against the Japanese currency, divided evenly between the US Treasury Department’s Exchange Stabilization Fund and the Federal Reserve System. This was after a bout of profound yen weakness that accompanied the Asian Crisis. It didn’t mark the absolute nadir in the currency’s value, but near enough.
And then in March 2011, following the Tōhoku earthquake and tsunami the G7 (remember them?) came together to support the BOJ in concerted exchange rate intervention. The Fed alone sold a $1bn worth of the currency. The move didn’t mark the absolute peak of the yen, but again, near-enough.
So — what about Friday? Mansoor Mohi-uddin, chief macro strategist at Bank of Singapore, reckons:
Late on Friday, the Federal Reserve and Bank of Japan were reported to have contacted banks to check exchange rates. . . . the two central banks would only have checked exchange rates if Washington and Tokyo were considering intervening directly to sell USDs to support the JPY.
We don’t yet know whether any cash was spent, or by whom. Just picking up the phone and asking everyone on the Street for prices might be enough to signal intent and cap further yen weakness.
But it was enough to give Alphaville flashbacks to being a young investment analyst in a global fixed income and currency team. Because the 1998 joint intervention set off a wild ride for the yen.
It preceded by a few months the disorderly unwind in October 1998 of the carry trade (in which traders would go short the yen and long US dollars to pick up the positive interest rate differential). A cool 23 big figures were wiped off the cross in 48 hours. 😱
Maybe the unwind would’ve happened without the intervention. Or maybe the US and Japanese governments intervening to put a cap on the carry trade’s profits might’ve had something to do with it. Contemporaneously, it felt very much like the latter.
And so it was (arguably) so successful in strengthening the yen that, as Ramana Ramaswamy and Hossein Samiei, two analysts at the IMF, put it back in 2000:
Surrealistically, the Japanese authorities were forced within the span of a few months to shift from a strategy of intervening to strengthen the yen to one of intervening once more to weaken the yen.
In the pantheon of leveraged trades, the yen carry trades no longer holds its nineties-level kudos. But Alphaville wondered whether the yen carry trade was still a thing and a big enough thing to be wary of.
Hyun Song Shin, Head of the Monetary and Economic Department at the Bank for International Settlement, set out a framework for estimating its size a couple of years ago on Bloomberg’s Odd Lots. We’ve brought Shin’s calculations up to date:
With individual stocks being valued in the trillions, ¥40tn (c$250bn) doesn’t seem like a huge number. Although ¥40tn heading for the same narrow door could do some damage. However, not all of this total will even all be accounted for by carry trades. As Shin put it “this is an upper bound for carry trades conducted on-balance sheet”.
That said, Shin also observes that there could also be off-balance sheet carry trades executed via FX swaps and not captured in the BIS numbers. And with USDJPY FX swap notional standing at c$14tn back in 2023, the BIS’s on-balance sheet loan data “is likely to be capturing only a small portion” of the trade.
Right now a stronger yen would suit both Tokyo and Washington DC. We suspect that a disorderly unwind of the carry trade would not.