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Explainer-What would Japan’s currency intervention to combat a weak yen appear to be?

Explainer-What would Japan's currency intervention to combat a weak yen look like? Reuters. Employees of the forex trading company Gaitame.com work before monitors displaying japan yen exchange rate contrary to the U.S. dollar at its dealing room in Tokyo, Japan September 7, 2022. REUTERS/Kim Kyung-Hoon/File Photo

By Leika Kihara and Tetsushi Kajimoto

TOKYO (Reuters) – THE LENDER of Japan has conducted an interest rate sign in apparent preparation for currency intervention, the website reported on Wednesday, citing unidentified sources, as policymakers stepped up warnings about sharp falls in the yen.

Apart from verbal intervention, Japan has several options to stem excessive yen falls. Included in this would be to directly intervene in the currency market and purchase up huge amounts of yen.

Here are information on how yen-buying intervention can work, the probability of this happening in addition to challenges:

WHEN DID JAPAN LAST CONDUCT YEN-BUYING INTERVENTION?

Given the economy’s heavy reliance on exports, Japan has historically centered on arresting sharp yen rises and taken a hands-off approach on yen falls.

Yen-buying intervention has been very rare. The final time Japan intervened to aid its currency was in 1998, once the Asian financial meltdown triggered a yen sell-off and an instant capital outflow from the spot. Before that, Tokyo intervened to counter yen falls in 1991-1992.

WHAT WOULD PROMPT TOKYO TO GET YEN AGAIN?

Currency intervention is costly and may easily fail given the issue of influencing its value in the huge global forex.

That’s one key reason it really is considered a last-resort move, which Tokyo would greenlight only once verbal intervention does not prevent a free of charge fall in the yen. The speed of yen declines, not only levels, will be crucial in authorities’ decision on whether so when to part of.

Some policymakers say intervention would only become a choice if Japan faces a “triple” threat — selling of yen, domestic stocks and bonds — in what will be much like sharp capital outflows experienced in a few emerging economies.

HOW WOULD IT NOT WORK?

When Japan intervenes to stem yen rises, the Ministry of Finance issues short-term bills to improve yen which it could then sell on the market to weaken japan currency’s value.

If it were to conduct intervention to avoid yen falls, authorities must tap Japan’s foreign reserves for dollars to market on the market in trade for yen.

In both cases, the finance minister will issue the ultimate order to intervene. THE LENDER of Japan will become a realtor and execute the order on the market.

DO YOU KNOW THE CHALLENGES?

Yen-buying intervention is more challenging than yen-selling.

Japan’s foreign reserves stand at $1.33 trillion, the world’s largest after China’s and likely comprised mostly of dollars. While abundant, reserves could quickly dwindle if huge sums must influence rates every time Tokyo steps in.

Which means you can find limits to just how long it could keep intervening, unlike for yen-selling intervention – where Tokyo can continue issuing bills to improve yen.

Currency intervention would additionally require informal consent by Japan’s G7 counterparts, notably america, if it were to be conducted contrary to the dollar/yen. That’s not easy with Washington traditionally against the thought of currency intervention, except in cases of extreme market volatility.

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