Did the MOF interventions work? – Commerzbank

On Wednesday, American economist Brad Setser argued in the Financial Times that the Japanese Ministry of Finance’s (MOF) interventions in favor of the yen have been very effective, regardless of the Bank of Japan’s (BoJ) monetary policy. Then it’s time to pick up the rocks again, notes Ulrich Leuchtmann, Head of FX and Commodity Research at Commerzbank.

JPY depends on fundamentals

“The interventions have had no lasting effect on JPY exchange rates so far. The MOF has repeatedly let previous intervention levels slip. Their effect on USD/JPY only became sustainable when they were accompanied by idiosyncratic USD weakness, and in particular when it became predictable that the BoJ’s monetary policy would be reversed.”

“Most of MOF’s foreign exchange reserves could have been purchased at much lower USD/JPY rates. MOF makes a profit from the interventions if they are successful, i.e. if the USD-JPY trades sustainably lower due to the interventions. Otherwise, it makes a loss.”

“A credible USD/JPY ceiling affects USD/PY prices well below this ceiling and that USD/JPY does not even come close to this ceiling. This is the old Krugman model of target areas for exchange rates, and I have not had a situation where the Krugman model applies. All this means that the JPY depends on the fundamentals, mainly the monetary policy of the BoJ. MOF cannot prevent fundamentally justified JPY levels in the medium to long term.”