Japan stepped in to support the yen for the first time since 1998 after it hit a 24-year low as its central bank resisted a trend toward higher interest rates.
Tokyo was forced to take measures in the foreign exchange market to shore up the weakening of its currency after the Bank of Japan (BoJ) maintained its ultra-loose monetary policy on Thursday.
Japan’s government sold U.S. dollars after the yen tumbled above 145 to the dollar on the Bank of Japan’s decision to leave its key interest rates in negative territory on a day when other central banks raised borrowing costs in a bid to cool inflation.
Japan’s Vice Finance Minister for International Affairs, Masato Kanda, told reporters that the government had “taken decisive measures” to deal with the yen’s sudden fall in the foreign exchange market.
The intervention, which lifted the yen 2% against the dollar to 141.2, showed Tokyo was losing patience with the currency’s sustained slide and underscored the impact a rising U.S. dollar is having on major economies.
Prime Minister Fumio Kishida said that Japan will respond decisively to excessive fluctuations in the currency market.
However, analysts warn that the intervention may not be effective as long as the Bank of Japan sticks to its ultra-low interest rate policy at a time when other central banks are tightening.
“The timing for this was very bad,” said Fawad Razakzada, market analyst at City Index and Forex.com. “What’s more, is the Bank of Japan reversing the government’s attempt to strengthen the yen?”
The dollar hit a new 20-year high against a basket of currencies ahead of Tokyo’s intervention, after The US Federal Reserve raised interest rates by 0.75 percentage points on Wednesdayits third consecutive increase of 75 basis points.
The greenback has strengthened steadily this year, in part because US interest rates have risen faster than elsewhere. Concerns that the global economy is weakening as inflation rises have also driven traders into the safe haven of the dollar, sending the euro to a 20-year lowand pound to its weakest point in 37 years.
The two biggest drivers of the dollar’s strength are often described as “the dollar’s smile,” explained James Atty, chief investment officer at Abrdn.
“On the one hand – the tightening of Fed policy, on the other – risk aversion – after all, the US dollar is the world’s reserve currency. For the last 18 months or so, both sides of the smile have been working at the same time,” added Atty.
A series of other central bank announcements added to market volatility on Thursday.
Bank of England raised its benchmark interest rate by another half point to a 14-year high, while Switzerland’s SNB lifted its key rate out of negative territory for the first time since 2014, up 75 basis points. A rise from minus 0.25% to 0.5% weighed on the Swiss franc as traders expected a full percentage point hike.
The Norwegian Norges Bank raised the cost of loans by half a point. He forecast a more gradual rise of 25 basis points at the next meeting, which weakened the Norwegian krone.
However, the Central Bank of the Republic Turkey surprised markets by cutting borrowing costs by a percentage point from 13% to 12%, even as inflation in Turkey hit 80% in August. The unexpected decline plunged the Turkish lira to a new record low, increasing pressure from the Federal Reserve on emerging market currencies.
The CBRT has steadily cut interest rates over the past year from 19% last summer, despite warnings that the move would hurt the currency and fuel inflation.
“You have to wonder what it will take for CBRT to admit that its experiment – at the worst possible time – has failed, but clearly we’re not there yet. It looks like there’s more pain to come,” said Craig Earlham, senior market analyst at OANDA.