Japan has announced that it has sold some of the country's U.S. dollars to curb the yen's continual slide against the U.S. greenback. The move was Japan's first intervention in FX markets since 1998.
Japan finance minister Shunichi Suzuki explained that the government was “concerned” with the financial situation within the country. Suzuki said it could not “overlook excess volatility arising from speculative behavior.”
The intervention took place several hours after the Bank of Japan had decided to keep interest rates low, going against other central banks. David Bahnsen of The Bahnsen Group said that Japan had to take the measure to reduce liquidity due to “volatility and uncertainty.”
“Excessive quantitative easing over the past decade is going to result in tightening excessiveing and the market has no way to properly price what this means for valuations,” Bahnsen added.
Forty minutes after the move, the yen strengthened by four percent to 140.31 against the U.S. dollar. Before the market closed for the day, the yen briefly went below the 141 lines again.
In the past, a low value in the yen was considered useful due to the country’s export-focused economy. Japan managed to boost foreign earnings by selling affordable products to consumers abroad. The benefits of a low value become “less straightforward” these days because manufacturing is more global. It becomes a burden as political instability in several areas has driven up import costs.
In the past year, the yen has lost more than 20 percent of its value against the U.S. dollar. This situation forced Japan to spend more on importing essential goods, including food and energy. The yen’s continuous drop is tied to Japan’s effort to maintain its interest rates low despite the U.S. hiking its rates several times, resulting in the dollar having a higher value.
On Wednesday, the Fed announced an interest rate hike by 75 basis points, leading the U.S. dollar to reach new two-decade highs. Fed chairman Jerome Powell also projected a higher hike by the end of this year.
Convera senior market analyst Joe Manimbo said that central banks’ moves to fight back against the hike had managed to cool down the U.S. greenback's latest surge. Manimbo noted, however, that the Fed’s determination to keep inflation at two percent would continue to strengthen the dollar.
Current stock market situation
After the Fed decided to hike the interest rate, the Dow Jones Industrial Average shed 0.3 percent. The S&P 500 saw a 0.78 percent decrease, while the Nasdaq Composite decreased by 1.47 percent.
Boston Partners global markets director Mike Mullaney said that earnings would likely come down 15 percent in 2023. Mullaney added that S&P 500 would revisit its low point in June this year at 3200 “under a recessionary scenario.”
Stocks also fell in Europe after Russia threatened to use nuclear weapons in the Ukraine war on Wednesday. Major British, French and German indices—FTSE, FCHI and GDAXI—went down by more than one percent. STOXX 600 index lost 1.79 percent and MSCI fell by 0.98 percent. The euro, however, rose by 0.06 percent against the U.S. greenback.
Stock markets in Asia hit a two-year low after the news of the interest rate hike by the Fed. Several Asian currencies, however, grew stronger against the U.S. greenback.