As Japan Finance Minister Azumi confirmed, the Ministry of Finance (MoF) intervened to sell JPY in the Tokyo morning session today, and USD/JPY rose from 75.6 to 79.3 (+4.9%) and EUR/JPY from 107.10 to 111.5 (+4.1%). While intervention was likely at some point given the continued post World-War-II lows in USD/JPY and the relatively sharp move in the early session today, the timing is likely to have been somewhat surprising to many market participants as Japanese equity markets and yen crosses have been relatively stable despite the stronger JPY vs USD.
With the rise of USD/JPY to around 79, the MoF’s latest intervention has achieved the same result as in previous episodes, on 4 August this year and 15 September last year (3 yen or 4% move). Moreover, if the effect of the initial move is reduced by selling orders from Japanese exporters, institutional investors and retail margin FX traders and others, we think the MoF may continue intervening into the European and NY sessions today, as FM Azumi stated that Japan would continue intervention until the government is satisfied.
Fundamentals are supportive for USD/JPY this time, as the US-Japan 10y yield gap has been widening since the beginning of October, thus, the recent slide in USD/JPY could be regarded as inconsistent with fundamentals (Figure 1). This week, key event risks are the FOMC meeting and release of US NFP data. But we do not expect surprises that could cause a decline in USD/JPY. Our current USD/JPY forecasts are 75 yen for both 1m and 3m, but if US fundamentals remain okay, then USD/JPY may be less likely to fall back to 75 yen again in the coming months as the intervention today has reduced the downside risk to USD/JPY. As for EUR/JPY, the EU Summit last week reduced some uncertainties and downside risk to EUR, but cyclical weakness of the Euro area and a potential rate cut by the ECB (we expect 50bp in December) could weigh on EUR/JPY towards the year end.
As usual, the size of the intervention and currencies purchased are unknown at this stage. We think the size could be as large as or even larger than the previous interventions (JPY2.1trn on 15 September 2010, and JPYY4.5trn on 4 August this year). As long as the MoF continues its intervention strategy of minimum frequency but maximum daily size, we think it will retain sufficient ammunition to maintain this policy for some time. At the moment, the MoF has around JPY24trn available, but if the limit on Financing Bill issuance for intervention is lifted in the third supplementary budget, which is likely to be passed in November, we estimate that its resources for intervention could increase by JPY15trn to JPY39trn.
The MoF will disclose its intervention transactions for October at 1900 JST today and outstanding FX reserves as at end-October by 8 November. But these data will not include today’s spot intervention, which will only be settled in two trading days time (2 November).
Figure 1: USD/JPY and US-Japan 10-year yield gap
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