After the release of the US CPI data, the Japanese yen jumped against the US dollar. Japanese authorities may use $22 billion to intervene in the foreign exchange market

According to Bloomberg's analysis of the Bank of Japan's accounts, shortly after the release of US inflation data on Thursday, Japan may intervene in the foreign exchange market for the third time this year to support the yen. The intervention scale may be around 3.5 trillion yen (approximately 220 billion US dollars).

This indicates that with data showing a general cooling of US inflation, market expectations for the Federal Reserve to cut interest rates quickly are increasing, and the Japanese monetary authorities are trying to seize this opportunity.

Among the actions taken to support the yen since September 2022, Thursday's suspected intervention will be the first action to boost the yen against the US dollar as the yen strengthens, a new development in Japan's strategy to put speculators in a passive position.

Japanese Finance Minister Toshimitsu Suzuki and Japanese Foreign Exchange Chief Masato Kanda declined to comment on speculation about foreign exchange intervention.

After significant overnight fluctuations in the yen, speculation about intervention surged. In the Tokyo market on Thursday night, more than half an hour after the US released lower-than-expected inflation data, the yen to US dollar exchange rate surged from around 161.58 yen to 1 US dollar to 157.44, an increase of slightly over 4 yen, similar in magnitude to most previous intervention actions.

The trend in the foreign exchange market suggests that Japan may take action.

Some market observers have already been alert to the possibility that if US prices are higher than expected, leading to a decline in the yen, Japan may take intervention measures. However, if the yen starts to strengthen, the possibility of the Japanese government intervening is not widely expected.

In the Tokyo foreign exchange market on Friday night, the yen to US dollar exchange rate was around 159.09. Since the beginning of the year, the yen has depreciated by over 11%, making it the most depreciated currency among major currencies.

Estimates of the intervention scale are based on changes in central bank accounts. The Bank of Japan reported on Friday that due to government fiscal factors, its current account may decrease by 3.2 trillion yen on the next working day (next Tuesday). In contrast, before the suspected intervention, private money brokerage firms including Central Tanshi, Totan Research, and Ueda Yagi Tanshi had an average forecast of an increase of 333 billion yen.

Totan Research analyst Yuichiro Takai stated, "After the US CPI data was released, the Japanese government is very likely to seize the opportunity of a stronger yen and weaker dollar to intervene, and could boost the yen on a scale lower than the approximately 4 trillion yen in May."

It has been proven that by comparing the estimates of money brokerage firms with the Bank of Japan's current account forecast, the approximate scale of intervention measures since September 2022 can be accurately calculated Earlier this year, after the Japanese yen fell to a 34-year low against the US dollar, the Japanese government spent a record 9.8 trillion yen in intervention actions at the end of April and beginning of May to support the yen. At that time, Bloomberg estimated the intervention scale to be 9.4 trillion yen.

The Japanese government has been working hard to reverse the situation in the foreign exchange market. For over two years, the inflation rate has been maintained at or above the Bank of Japan's target level of 2%, with the yen being a major driving factor. With real wages declining, consumer spending has been decreasing every quarter in the year ending in March.

One of the main factors driving the yen lower is the interest rate differential between the United States and Japan, especially considering the difference in long-term bond yields taking inflation into account. This indicates that raising interest rates by the Bank of Japan or lowering rates by the Federal Reserve could help boost the yen.

The Bank of Japan has repeatedly stated that its policy is not aimed at the yen and has expressed unwillingness to openly change policies to support the yen. However, Bank of Japan Governor Haruhiko Kuroda has indicated that if yen weakness leads to changes in inflation prospects, policy changes may be considered.

Opinions are divided on the impact of possible intervention on the Bank of Japan's policy decision on July 31. Some economists believe that intervention actions increase the likelihood of a rate hike, as the Bank of Japan would need to take the next step after the Japanese government's response. Others believe that with the pressure on the yen easing, the likelihood of a rate hike is lower.

Official monthly intervention data will be released on July 31, when Masato Kanda will step down in the regular reshuffle of the Japanese government, to be succeeded by Jun Mimura, the current Director-General of the International Bureau of the Japanese Ministry of Finance