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Tokyo may have had clear reasons for choosing to intervene on October 31, although the timing and scale of the intervention came as something of a surprise to the market. It was the last trading day of the month and the technical analysis at the time exposed the yen to strong downside risks, which have now been averted, says Issei Suzuki, FX strategist at Citi.
“Since the month end has passed and the risk of USDJPY breaking below Y75 is now greatly diminished, the possibility that Japan will intervene in the currency markets again is low in the short-term,” says Suzuki.
A clear point to take away from the Bank of Japan’s presence in FX markets on Monday is that Japan is becoming more aggressive in its intervention strategy, not only in terms of size but also frequency, says Lee Hardman, FX strategist at Bank of Tokyo-Mitsubishi UFJ.
The level of yen selling by the Japanese authorities is widely estimated to have been in the region of Y8 trillion, almost double the previous record of Y4.5 trillion in August. The time between these interventions has also decreased. It had been less than three months since Tokyo intervened in August, whereas previously it had been more than a five-month gap.
“Although a further bout of yen selling in the next couple of days would represent a significant shift in its FX intervention stance, which we think is unlikely, the risk of that happening sooner than previously seems greater,” says Hardman.
As with previous intervention attempts, despite the vast scale of yen selling, the Japanese authorities are unlikely to successfully counter overriding demand for the yen. EURJPY retraced virtually most of its intial move higher, trading at Y107.6 during the London session on November 2, while USDJPY has been relatively stable, hovering around Y78.
“What we’ve seen is that there remains substantial pent up demand for the yen immediately following intervention from the BoJ,” says Hardman.
Bank of Tokyo-Mitsubishi UFJ says it saw significant pick up in its corporate activity which, coupled with yen buying from the liquidation of the short yen speculative decisions from the Japanese margin trading community, are the key drivers that prevent intervention from having a long-term impact.