Strong US CPI data this week triggered a renewed slide in the yen to the brink of 145 and warnings from the Ministry of Finance that it could intervene. The Bank of Japan is also reported to have resorted to a yen rate check – calling dealers to enquire about buying or selling the yen – which some see as a precursor to possible action. The yen did step back from 145 after news of the rate check broke, but the sustained effectiveness of such gestures in the face of a widening yield differential is questionable at best. Indeed, even if the Bank were to intervene directly with its FX reserves at the instruction of the Ministry, it is far from guaranteed that this would stop the yen from weakening further. Interventions have a patchy track record and weren’t very effective last time they were tried during the Asian Financial Crisis. Yen turnover in the FX market has tripled since then. Academic evidence points to lower success rates if interventions go against the market trend, which would be the case here.
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