Live Markets: Japan's yen: Why Tokyo may be holding fire for now

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JAPAN'S YEN: WHY TOKYO MAY BE WAITING BEFORE FIRING AGAIN
Japanese authorities have held off from a second round of yen-buying intervention, despite the currency trading close to its lowest level in 40 years, and Citi sees several reasons for this restraint. 
First, they believe Japan remains mindful of the IMF's exchange-rate classification system. Japan is currently classified as having free-floating arrangements. 
That status assumes that intervention is for exceptional circumstances and must be limited to, at most, three instances in six months, each lasting no more than three business days. 
"We think the Japanese government is most likely conscious of this categorisation when implementing currency policy," Citi says.
Japanese officials spent some $73.5 billion on a series of interventions in late April and early May that briefly sent the dollar down to 155 in early May. It has risen 4.5% since then to around 161.9.
More importantly, Japan's relationship with the U.S. is a factor, according to Citi.
"What was important was that when visiting Japan in May, U.S. Treasury Secretary Scott Bessent confirmed a supportive stance toward Japan’s currency policy," Citi says. 
"Given this, however, it is somewhat surprising that Finance Minister Satsuki Katayama needed to reconfirm the policy stance with Secretary Bessent again this week."
The third factor is the domestic policy environment. 
"Given her reflationary penchant, PM Takaichi may in fact have felt little opposition to JPY weakness," Citi says. 
"The fact that the recent rise in long-term interest rates has been relatively orderly despite marked yen weakness may well cause the government to downgrade the priority on its policy to defend the JPY."
And finally, market conditions could be a reason why they have held off, so far. 
"The fact that Japanese equities remained strong when the JPY appreciated on FX intervention two months ago should have been encouraging for the Takaichi government and the MoF," Citi says.
"However, we would not be surprised if the government is becoming more cautious regarding decisions on intervention policy, now that the U.S. and Japanese equities are growing more unstable."
Even so, Citi continues to see 160-162 yen per dollar as the range in which further intervention is likely, with the government likely to aim to push the pair down to 155-157.
(Samuel Indyk)
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