A return to the intervention playbook
Japan has a long history of entering the currency market, although the motivation has changed considerably over the past three decades.
The latest episode began in July, when USD/JPY climbed towards ¥164 and the yen fell to its weakest level in around four decades. Japan’s Ministry of Finance subsequently confirmed that it had bought yen in coordination with the US Treasury on July 31, using direct intervention to counter what it described as excessive volatility and disorderly movements. Tokyo also explicitly left the door open to further joint intervention.
The operation was significant. Japanese government data subsequently showed that authorities spent ¥15.4 trillion, equivalent to about $96.5 billion, supporting the yen between July 30 and August 26. The period included the July intervention and represented the largest monthly intervention operation on record.
The intervention initially worked spectacularly. USD/JPY plunged from above ¥164 towards ¥155, with the yen gaining more than 5% against the dollar in a matter of days.
But the subsequent recovery in USD/JPY has provided an important warning. Much of the intervention-driven yen appreciation had since been reversed, taking the pair back to above the ¥160 mark. That created the conditions for another confrontation between markets and policymakers.
The symbolism of the July operation was also considerable. It represented the first confirmed joint US-Japanese yen-buying intervention since 1998, signalling a major escalation in the willingness of Washington to help Tokyo stabilise its currency.
Japan’s earlier history of intervention provides plenty of clues about what could happen next.
In June 1998, Japan and the US conducted a surprise coordinated intervention after the yen had fallen to an eight-year low. The yen appreciated by more than six yen against the dollar in the immediate aftermath.
The direction of intervention subsequently changed. Between 2003 and early 2004, Japan was attempting to weaken the yen rather than strengthen it. Authorities conducted a huge campaign of dollar buying and yen selling, spending around ¥35 trillion to prevent excessive yen appreciation and protect Japanese exporters.
That period demonstrates an important feature of Japanese intervention: policymakers do not necessarily target a specific exchange-rate level. Instead, intervention is generally aimed at excessive or disorderly moves.
The next major phase came in 2010 and 2011. As the global economy recovered from the financial crisis, the yen strengthened sharply as a safe-haven currency. Japan intervened in September 2010 after USD/JPY fell towards ¥82.87.
Following the devastating March 2011 earthquake and tsunami, Japan again participated in coordinated intervention with other major economies as the yen surged amid repatriation flows and safe-haven demand.
The pattern then changed dramatically. For more than a decade, Japan largely stayed out of the market.
That restraint ended in 2022.
