Bank of Japan Steps In: Did They Successfully Defend the Yen?

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The Bank of Japan (BOJ) took a bold step to curb the weakening yen in late April 2024, marking their first intervention since September 2022. The Japanese currency had been on a downward spiral, reaching a 34-year low against the US dollar. This intervention aimed to stabilize the yen and mitigate the negative impacts of a depreciating currency.

Why Intervene?

Several factors fueled the BOJ’s decision:

  • Yen Depreciation: The yen’s weakness threatened to exacerbate inflation, as imports became more expensive.
  • Policy Divergence: Unlike other central banks raising interest rates to combat inflation, the BOJ maintained ultra-loose monetary policy, widening the interest rate gap and weakening the yen.
  • Speculative Trading: The rapid depreciation might have been fueled by speculative activities, further destabilizing the market.

Intervention Details:

The exact details of the intervention remain undisclosed, but market analysts estimate the BOJ spent trillions of yen to buy yen and sell US dollars. This action aimed to increase demand for yen and weaken the dollar’s dominance.

Impact of the Intervention:

The initial response was positive. The yen strengthened against the dollar following the intervention news. However, the effect proved temporary. The yen’s depreciation resumed shortly after, raising questions about the intervention’s long-term effectiveness.

Looking Ahead:

The BOJ faces a dilemma. Maintaining low-interest rates is crucial for economic growth, but it weakens the yen. Further intervention might be necessary, but its success hinges on addressing the underlying policy divergence with other central banks.

Key Takeaways:

  • The BOJ intervened to support the weakening yen in April 2024.
  • The intervention had a limited short-term effect.
  • The BOJ’s future approach will depend on managing inflation and currency stability.

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