USD/JPY: Yen Interventions Raiding a False Alarm?

 The Bank of Japan's inaction put more pressure on the value of the currency even though it maintained the QE program's parameters and key rate. As a result, EUR/JPY hit 2007–2008 levels and USD/JPY hit 156.80.

The levels where the market turnaround happened almost a year later and where the October 2022 intervention took place have already been exceeded by the USD/JPY. This raises the question of "when," but it also raises the question of "will they."

The nominal values of specific currency pairs are not the focus of governments or central banks. Since sudden changes might result in inflation and economic shock, dynamics are important to them. Consequently, examining the dynamics of a currency basket is more beneficial.

The yen's nominal effective exchange rate has dropped to levels not seen since the 1990s. On the heels of problems in developing nations, the yen reversed course and began to strengthen in 1997, roughly at the same rate. The 2007 global financial crisis put pressure on the yen, which caused it to rise by 5%. Because the yen has frequently moved around these levels over the last 34 years, the current levels are not an exception.

There is a chance that inflation will rise as a result of the yen's decline. We have observed that when year-over-year fluctuations get close to 20%, the government and CB start to engage in the market. One year on year, USD/JPY is up 17%, while EUR/JPY is up 13%. This is a significant amount, but it permits the government to remain impartial towards the fervour of traders and the financial media.

Because the yen's depreciation is being quantified using historical data, it is not possible to discuss a currency shock to the economy.

We can look at the region around 160 on the USD/JPY, which marked the market's turnaround in April 1990, as the closest turning points. The EUR/JPY is at a similar level around 170. Intervention is uncertain at these levels. If the yen crashes instead of gradually approaching its target, the likelihood of intervention in free FX pricing will undoubtedly rise.