FX Daily: Lessons from JPY interventions in 1998
The market is vigilant of potential interventions by Japan to stabilize the JPY exchange rate. Nikkei reported that the Bank of Japan conducted rate checks on the offer price for the JPY. Vice Minister for International Affairs at the Ministry of Finance Masato Kanda warned that “all options remained on the table” to address the “unruly and excessive FX moves harming the economy.”
Japan last intervened to support the JPY in December 1997, April 1998, and June 1998. The JPY had plummeted with East Asian currencies during the Asian Financial Crisis. Japan’s CPI inflation fell below its US counterpart; core inflation (excluding food) turned negative that year. The greenback was a haven from America’s Strong USD policy. Investors fled from emerging markets into US equities.
The first intervention in December 1997 did not prevent USD/JPY from pushing higher towards 135 in January 1998, the first capitulation of the Asian financial crisis. The 122 low in February 1998 on the relief rally in the region was brief. In April 1998, USD/JPY rose to 135.47 again before falling to 127.38. However, the second capitulation of the Asian crisis boosted USD/JPY to 146.78 in June before its fall to 133.69.
Meanwhile, Japan’s inflation plunged and fell below its US counterpart in 2Q98. Asia endured a third round of selling pressures until Malaysia pegged the MYR on 1 September. USD/JPY peaked at 147.66 in August before the collapse of the hedge fund, Long-Term Capital Management (LTCM), triggered an unwinding of short JPY positions. The Fed responded with three rate cuts in September-November to stabilize global financial markets; USD/JPY extended its fall from 130 to 115.
The above experiences in 1998 suggested that interventions alone could hurt speculators in the short term but the medium-term requires changes in the external forces driving the JPY’s weakness, factors beyond the control of Japan’s officials. In today’s case, that will be the Fed’s determination to control inflation with higher rates, a challenge made more difficult by other central banks joining in with jumbo rate hikes. Unless an event risk pops up and threatens stability in global financial markets, the Fed is in no mood to reverse its recent pushback against markets pricing in rate cuts next year. As things stand, markets are wary that the Fed may send the USD higher by signalling a higher terminal rate above 4% next year at the FOMC meeting on 21 September.
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