Explainer-What would Japanese intervention to boost the weak yen look like?

TOKYO : Japanese authorities are facing renewed pressure to combat a sustained depreciation in the yen, as investors eye prospects of higher-for-longer U.S. interest rates while the Bank of Japan remains wedded to its super low interest rate policy.

The yen strengthened sharply against the dollar on Tuesday, leading some market participants to believe Japanese policymakers had intervened to support the currency, although others said the size of the move was not convincing enough.

Below are details on how yen-buying intervention works:

LAST CONFIRMED YEN-BUYING INTERVENTION?

Japan bought yen in September of last year, its first foray in the market to boost its currency since 1998, after a Bank of Japan (BOJ) decision to maintain its ultra-loose monetary policy drove the yen as low as 145 per dollar. It intervened again in October after the yen plunged to a 32-year low of 151.94.

WHY STEP IN?

Yen-buying intervention is rare. Far more often the Ministry of Finance has sold yen to prevent its rise from hurting the export-reliant economy by making Japanese goods less competitive overseas.

But yen weakness is now seen as problematic, with Japanese firms having shifted production overseas and the economy heavily reliant on imports for goods ranging from fuel and raw materials to machinery parts.

WHAT HAPPENS FIRST?

When Japanese authorities escalate their verbal warnings to say they “stand ready to act decisively” against speculative moves, that is a sign intervention may be imminent.

Rate checking by the BOJ – when central bank officials call dealers and ask for buying or selling rates for the yen – is seen by traders as a possible precursor to intervention.

DID TOKYO INTERVENE AGAIN?

Japan’s top currency diplomat Masato Kanda told reporters on Wednesday authorities will take “appropriate steps against excessive moves, without ruling out any options.” Kanda, who has made similar comments in recent weeks, declined to say whether Tokyo intervened overnight on Tuesday.

Kanda may be relying on psychological tactics to fight yen bears, as Tokyo did last October by holding off on immediately confirming whether intervention took place.

By staying mum, authorities can keep investors guessing and discourage speculators from testing the yen’s new lows – a tactic known as “stealth intervention.”

Investors will know whether Tokyo intervened, and if so how much it spent, when the Ministy of Finance releases monthly intervention data, usually at the end of each month.

LINE IN THE SAND?

Authorities say they look at the speed of yen falls, rather than levels, and whether the moves are driven by speculators, to determine whether to step into the currency market.

With the dollar having breached the psychologically important 150-yen level, many market players see 151.94 yen, where Japan last intervened, as the next threshold, then 155.

WHAT’S THE TRIGGER?

The decision is highly political. When public anger over the weak yen and a subsequent rise in the cost of living is high, that puts pressure on the administration to respond. This was the case when Tokyo intervened last year.

While inflation remains above the BOJ’s 2 per cent target, public pressure has declined as fuel and global commodity prices have fallen from last year’s peaks.

If the yen’s slide accelerates and draws the ire of media and public, the chance of intervention would rise again.

The decision would not be easy. Intervention is costly and could easily fail, given that even a large burst of yen buying would pale next to the $7.5 trillion that change hands daily in the foreign exchange market.

HOW WOULD IT WORK?

When Japan intervenes to stem yen rises, the Ministry of Finance issues short-term bills, raising yen it then sells to weaken the Japanese currency.

To support the yen, however, the authorities must tap Japan’s foreign reserves for dollars to sell for yen.

In either case, the finance minister issues the order to intervene, and the BOJ executes the order as the ministry’s agent.

CHALLENGES?

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

While Japan holds nearly $1.3 trillion in foreign reserves, these could be substantially eroded if Tokyo intervened heavily repeatedly, leaving authorities constrained over how long they can defend the yen.

Japanese authorities also consider it important to seek the support of Group of Seven partners, notably the United States if the intervention involves the dollar.

Washington gave tacit approval when Japan intervened last year, reflecting recent close bilateral relations. U.S. Treasury Secretary Janet Yellen said last month the question of Washington giving the greenlight over another yen-buying intervention by Japan “depends on the details” of the situation.