Japan spent record $96.5 billion to support yen over past month, ministry data shows

Japanese authorities spent an unprecedented 15.4 trillion yen ($96.5 billion) intervening in foreign exchange markets over the past month to bolster the domestic currency, according to data released by the Finance Ministry on Friday. This massive intervention demonstrates Tokyo's unwavering commitment to preventing the yen from reaching historic lows, a situation that poses risks to the profits of major Japanese exporters and escalates import expenses, including those for energy.

Japan's energy dependence is significant, with 95% of its energy imports sourced from the Middle East, making it vulnerable to supply disruptions potentially triggered by the ongoing conflict in Iran. The Bank of Japan's (BOJ) relatively subdued rate tightening policy has allowed the yen to remain undervalued compared to currencies like the U.S. dollar, enticing investors to fund global transactions using cheap yen.

The BOJ maintained its interest rates unchanged during their July meeting; however, officials have indicated a readiness to accelerate tightening efforts. Presently, there is a 65% probability that the next BOJ meeting in September will see a rate increase. The Finance Ministry data encompasses the timeframe from July 30 to August 26, with a comprehensive daily breakdown anticipated only after the release of quarterly figures, expected in early November.

The BOJ initiated market purchases of yen on July 30 and July 31, including an unprecedented joint action with the U.S., as the Japanese currency plummeted to its weakest point in four decades, trading as low as 164 per dollar. The Bank of Korea similarly timed its own intervention in the won market with Japan's to augment the effectiveness of these measures.

Earlier this month, BOJ data indicated that the intervention on July 30 could have reached a staggering 9.6 trillion yen, surpassing the current record of 6.3 trillion yen set on April 30. The yen's value surged from approximately 163 per dollar initially to a peak of 155.20 on August 3, before stabilizing around 159.50, where it has been hovering since August 10.

To reinforce the perception of Japan's capacity for extensive intervention, the U.S. has suggested that Tokyo could utilize a COVID-era Federal Reserve backstop for major central banks. This facility, established in 2020 to stabilize markets during the pandemic, enables Japan to increase dollar liquidity without directly selling U.S. Treasuries.

Treasury Secretary Scott Bessent recently affirmed that the U.S. will "do whatever it takes" to assist Tokyo's endeavors to stabilize the yen, emphasizing that its substantial undervaluation could give rise to other economic complications or prompt competitive devaluations of other currencies.