Japan Has Two More Windows for Yen Intervention by IMF Rules

(Bloomberg) — Japan can conduct only two more sessions of three-day interventions by November if it wants to maintain its status of having a freely floating exchange rate, based on International Monetary Fund guidelines.

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A Japan Finance Ministry official cited an IMF rule on Monday noting that three days of intervention count as a single market operation. The comments came after the yen surged Thursday following reported intervention by the authorities, and also saw a number of intraday rallies on the following days.

Still, market participants are largely of the view the yen will resume its weakening trend with or without official intervention. The Iran war is negative for Japan’s energy-import-reliant economy, and wide interest-rate differentials with the US are denting sentiment, ensuring the currency remains under pressure.

“Whether the yen can hold onto its gains will probably depend on two factors,” said Matthew Ryan, head of market strategy at Ebury. “Firstly, the willingness of authorities to continue to intervene should the USD/JPY cross continue to test the 160 level. Additionally, whether or not the Bank of Japan will raise rates, and signal an openness to do more, at its June meeting.”

The yen strengthened as much as 0.8% in Asia Monday before paring gains, sparking discussions across trading floors as to whether officials had waded into markets once again to bolster the currency. The surge came after Japan likely spent around ¥5.4 trillion ($34.3 billion) last week to support the yen after it had weakened past 160 per dollar.

On Tuesday, the Japanese currency was about 0.4% weaker at 157.88 per dollar in late afternoon trading in New York.

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IMF rules state that conducting up to three episodes of currency interventions within six months is consistent with a free-floating exchange-rate regime, the Japanese Finance Ministry official said on Monday. If the authorities exceed that number, then the IMF tends to classify the exchange-rate regime as floating rather than free floating, the official said.

The IMF did not immediately respond to a request for comment.

“Japan has a lot of FX reserves” to give it the firepower to intervene in markets, Joey Chew, head of Asia foreign-exchange research at HSBC Holdings Plc, said on Bloomberg Television. “It’s about the efficacy — whether it’s good timing to do it right now when oil prices are still rising.”

Japan’s Finance Minister Satsuki Katayama said on Monday that the authorities can take bold action on speculative currency moves in line with a US-Japan agreement. Even if Japan is on a public holiday, intervention can still be counted if global markets are open, an official said.

Some in the market are pondering what may happen if Japan decides to conduct more operations than the three allowed under the IMF guidelines.

“We are still a long way from there, but history shows that it is hard for the IMF to enforce currency rules,” said Rodrigo Catril, a strategist at National Australia Bank Ltd. in Sydney. “Future FX interventions should be expected,” unless there’s a material change in factors such as Japan’s ultra-loose fiscal policies, he said.

Options traders still see a roughly 52% chance the yen will weaken to 160 per dollar again by the end of June, according to data compiled by Bloomberg.

“Without the Bank of Japan hiking at a pace commensurate to inflation, the yen will only weaken,” said Damien Loh, chief investment officer at Ericsenz Capital in Singapore.

–With assistance from Vassilis Karamanis, Carter Johnson and Mark Tannenbaum.

(Updates with pricing, adds comment from Ebury.)

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