Japan Spent Over $40 Billion Propping up the Yen in October

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Sometimes, it takes money to make money. Japan just found out exactly how much.

In September, the Japanese government began buying yen to stabilize the spiraling currency — the first such action the country has taken in a quarter century. On Monday, one month later, Japan’s Ministry of Finance released new data revealing Tokyo dropped roughly $43 billion in October on the intervention. While the measure largely succeeded in avoiding a worst-case scenario, the currency is still fighting to keep its head above water against the almighty dollar.

The Yen is Mightier than the Sword

As the rest of the world raises rates to tide the seemingly never-ending scourge of inflation — an action the Fed is again expected to take in the US later this week — Japan’s central bank has taken the exact opposite approach, keeping rates ultra-low in an attempt to incite both economic and wage growth.

But the Bank of Japan remains out of step with the federal government in Tokyo. With the yen at a 32-year low, the government commenced its first yen-buying operation since 1998, spending roughly $20 billion in September before October’s gargantuan outlay. The intervention has, however tenuously, managed to establish a floor in the currency, but by all accounts, like other foreign currencies, the yen is likely to continue to struggle:

  • Institutional investors often turn to the US as a sanctuary during periods of weak global economic conditions, and interest rate hikes only make dollar-denominated assets more attractive to investors.
  • Foreign investors typically use the dollar when pouring money into US stocks and bonds, which in turn also boosts the currency. The WSJ Dollar Index, which weighs the US dollar against 16 other currencies, is up nearly 16% so far this year.

Right on Target? Last week Haruhiko Kuroda, governor of the Bank of Japan, once more ruled out rate hikes. He said Japan remains on track to achieve a 2% core consumer inflation target, adding that rate hikes will remain off-limits until wages increase enough to match rising prices. Not to be outdone, Tokyo’s top currency diplomat ​​Masato Kanda said the country’s $1.3 trillion war chest of easily-tapped foreign reserves gives it “limitless” resources to continue staging yen-buying interventions. Looks like the fiscal policy tug-of-war shall continue apace.