The MoF looks increasingly like it has won the first round in the battle to support
the JPY, with USD/JPY remaining significantly below the 150 level and well below
its peak at 151.95. We attribute the MoF’s success so far to three factors Firstly, it
has adopted a ‘sniper’ approach to intervention. After announcing its first round of
intervention on 22 September, the MoF has not confirmed any further intervention.
From its monthly Foreign Exchange Operation reports, however, we know the MoF
has spent about USD60bn on supporting the JPY so far. But by not confirming
intervention at the time it occurs, the MoF has kept traders guessing at when it will
ask the BoJ to intervene. This tactic has meant spending less money to prevent
the market driving USD/JPY higher. We continue to think, however that JPY2-3
moves in USD/JPY in one trading day act as a trigger for intervention as the MoF
can justify the intervention to the UST as reducing FX volatility. Second, a show of
resolve has also helped the MoF. MoF balance sheet data released earlier in the
week shows a fall in foreign assets by the amount roughly equal to the MoF’s
suspected second round of intervention in October. Foreign held deposits, the
liquid assets the MoF was expected to draw upon first to finance intervention in
order to avoid selling USTs, was little changed. Selling foreign assets to finance
intervention signals to investors that the MoF will not be limited to the USD120-
130bn in liquid assets when financing its intervention and that its full USD1.18trn
arsenal of FX reserves is available to be deployed. Third, the change in
international conditions has helped the MoF by weakening USD/JPY. The Fed signalling a slower pace of rate hikes, a softening in US economic data as well as an improvement in risk sentiment have helped here.Whether or not this third factor
remains in favour of the MoF will be tested later today with the release of US CPI
data, where “sticky” inflation could see the MoF’s resolve tested again.