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Bank of Japan (BOJ) – Forex Market Intervention


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Bank of Japan (BOJ) – Forex Market Intervention

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The Bank of Japan’s hyper-lax monetary policy has come under pressure from global central banks which are launching a series of programs to hike rates and shrink balance sheets. While many central banks, including the Federal Reserve (Fed) and the Bank of England (BoE), are trying to navigate a difficult path of suppressing massive inflation while leaving their economies with enough liquidity to grow, the BoJ The U.S. has a different set of problems, namely anemic growth and persistently below-target inflation. As the interest rate gap between Japan and other major economies widens, the Japanese yen is weakening. And the Bank of Japan is not only standing by and allowing this to happen, it is actively encouraging the move.

interest rates and forex market

benefits of weak currency

A weaker currency, as compared to peers, helps boost the country’s export sector by making its goods more competitive than its competitors. These additional sales in turn help to promote economic growth, the jobs market and the balance of payments of countries. A weak currency also makes imports more expensive, leading to higher inflation. By raising or lowering its currency, a country can help propel its economy toward its desired landing zone without resorting to punitive, domestic financial measures.

Central Banks and Monetary Policy: How Central Banks Set Policy

While in theory it seems economically prudent to move one’s currency around in line with domestic policy, currency manipulation is typically carried out by one’s largest trading partners. The US Treasury has a set of guidelines that it considers currency manipulation and if these are met, the US will engage with the country involved to eliminate the unfair competitive advantage created by this manipulation. If all else fails, the US could impose trade sanctions against its counterparty.

History of Bank of Japan Intervention

The Bank of Japan has actively intervened in foreign exchange on several occasions since the introduction of the Japanese yen against the US dollar in 1973. The central bank has repeatedly intervened over the past 25 years to either keep the currency attractive or try to help exporters. and weaken the currency to spur growth and inflation. The Bank of Japan introduced quantitative easing in early 2000 in an attempt to spur inflation by offering to buy bulk amounts of government bonds at fixed interest rates. The program was upgraded on several occasions to increase the number of bonds that the central bank could buy, adding asset-backed securities to the mix and then adding equities to the basket of assets that the BoJ would buy. Will buy The Bank of Japan is currently the largest holder of Japanese equities through various ETFs, and holds approximately 50% of the Japanese bond market.

Bank of Japan: A Forex Trader’s Guide

The monthly USDJPY price chart shows a series of sharp long-term reversals in the currency pair as the Bank of Japan changes course on monetary policy.

USD/JPY Monthly Price Chart

Source: Prorealtime

Talking Japanese Yen Up and Down

In common with other central banks, market communication is an essential and powerful tool that the Bank of Japan uses to drive the value of the yen. As the currency nears a certain level, the Bank of Japan becomes more vocal about what level it will be comfortable with. If the currency becomes too expensive for the BoJ, they will try and ‘talk up’, whereas if the currency is too low they will let the market know by ‘talking the currency up’. For a bank to be effective in talking a currency up or down, it must have market credibility or a history of backing its views with concrete action. The monthly chart shows that the 125.00 level remained in place for almost two decades as it was seen by the market as the BoJ line in the sand. This level has now been broken.



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