- The BoJ mediated in the financial industry this week after more than 20 years.
- Though the massive gesture that it will not accept a weak JPY, BoJ has restricted firepower.
- USD-JPY exchange rate revives from its lows as market players appear ready to sell JPY.
The previous week has been wild for currency traders. The USD soared across the Forex board, especially as the trading week closed on Friday. However, economists had more to check than the USD’s strength.
Meanwhile, the Bank of Japan ensured its first mediation in the currency space since 1998. That catalyzed an epic dip in the Japanese Yen pairs, busting most bulls. Moreover, the USD-JPY exchange rate declined from 146 to under 141 due to the strengthening dollar.
Meanwhile, the sudden yen strength sent numerous short traders out of the market. According to history, currency intervention isn’t a strategic solution. Furthermore, BoJ’s resources to battle the Japanese yen’s weakness remained restricted if not followed by rate increases.
Bank of Japan’s Limited Firepower
A central bank mediation within the currency market remains a bold action. Meantime, you can check SNB’s (Swiss National Bank) losses as it battled to keep the EUR/CHF tie at 1.20. It had to surrender the floor at 1.20, catalyzing a seismic wave within the currency market.
The BoJ’s direct mediation to propel the JPY isn’t something to overlook. Moreover, the fact that it comes for the initial time in over 20 years shows what we could be having. Nevertheless, the bank boasts limited firepower. Let’s assess the details to understand why.
Meanwhile, the BoJ holds United States Treasury binds & dollars as foreign reserves. The central bank intervened in USD/JPY’s exchange rate, and other currencies followed. Thus, the BoJ sold its dollar reserves and purchased JPY in the open market to propel the yen.
However, considering the foreign exchange turnover and the nation’s foreign reserve size, its firepower to mediate within the currency market remains limited to around three days. That way, the JPY’s weakness would resume unless accompanied by massive moves like rate hikes or more.