Soaring Japanese yen spurs speculation of stealth intervention
The yen’s surge beyond a key threshold against the US dollar has sparked speculation among traders in Tokyo that Japan’s $1.6tn government pension fund could engage in “stealth intervention” to soften the currency over coming weeks.
Traders said Monday’s sharp strengthening in the yen past the ¥106 mark against the dollar, alongside further US-China-related volatility in foreign exchange markets, raised the possibility that the Government Pension Investment Fund might discreetly accelerate planned purchases of overseas assets to offset broader yen-buying.
If that happened, said analysts, it could point to a new unofficial intervention lever at a time when “jawbone” tactics may prove too weak and formal action risked heavy diplomatic consequences, particularly from Washington.
Japan has stuck to global agreements against competitive devaluation; its most recent formal intervention in the forex market happened after the devastating Fukushima earthquake and nuclear crisis in 2011.
Mansoor Mohi-uddin, senior macro strategist at NatWest Markets, warned investors that the GPIF and other state-linked Japanese asset managers were likely to have more influence in currency markets in coming months, particularly if the rate cuts by the US Federal Reserve put sustained upward pressure on the yen.
The GPIF — the world’s largest pension fund — currently holds around 17 per cent of its total assets in foreign bonds and 25.5 per cent in foreign equities, close to its respective targets of 15 per cent and 25 per cent. However, its guidelines permit significant fluctuation around those targets, which allows the fund the scope to buy a further $140bn of overseas securities, according to Mr Mohi-uddin.
“In a risk case where the yen strengthens sharply and the Trump administration is adamantly opposed to the [Bank of Japan] intervening on behalf of the Ministry of Finance in the currency markets, the GPIF has the ability to ramp up its purchases of overseas securities and offset much of Japan’s annual current account surplus,” he said.
He added the mere threat of such “large but covert intervention” could produce significant downward pressure on the yen.
The yen surged into the ¥105s against the dollar on Monday as Beijing’s decision to let its currency weaken beyond a key threshold roiled global markets and prompted the Trump administration to label China a “currency manipulator”.
The yen’s sudden move prompted an emergency meeting of officials from the Finance Ministry, Financial Services Agency and BoJ.
After that meeting Yoshiki Takeuchi, vice-finance minister for international affairs, said: “As we have said, it is necessary to take action based on the G7 and G20 agreement should currency moves have a negative impact on the economy and on financial markets.”
Although investors largely read the remarks as a signal Japan was technically ready to intervene, most have assumed it would not do so unless the yen moved more aggressively towards the ¥100 mark against the dollar.
Despite traders’ speculation, some analysts, including Wisdom Tree Japan head Jesper Koll, believe that the GPIF is not a political creature and that its attempts to set itself up as a model of governance make the chances of it being dragged into intervention efforts “almost nil”.
Japan’s status as the world’s largest creditor, and the assumption that the country’s companies could repatriate capital in times of stress, give the yen a tendency to rise during periods of heightened geopolitical and market anxiety.